Australia: Shifting The Onerous: Onerous Land Disclaimed By Bankruptcy Trustees Can Also Become Onerous For Lenders

This update deals with "onerous property" and the issues involved when a trustee in bankruptcy disclaims onerous land, including the potential impact on lenders.

Disclaimer of onerous land by a trustee in bankruptcy

At any time, the trustee of a bankrupt estate may disclaim land which is burdened with onerous covenants or is unsaleable or not readily saleable (s 133 of the Bankruptcy Act 1966 (Cth)).

A disclaimer of this type discharges the trustee from all personal liability in respect of the disclaimed property as from the date the property vested in the trustee.

It is possible to challenge disclaimers in Court, so it is important for trustees to ensure they hold satisfactory evidence in support of their decision to disclaim.

A disclaimer is only effective if the trustee gives proper notice. There is no prescribed form for a notice of disclaimer of land, but the notice must:

• be in writing and signed by the trustee
• identify the bankrupt and the property being disclaimed
• be given to each person who has an interest in the property (for example, other registered proprietors and mortgagees).

The trustee should also give notice of the disclaimer of land to the relevant land title office (for example, the Registrar General who oversees the NSW land title system).

A liquidator may exercise similar powers of disclaimer (s 568 of the Corporations Act 2001 (Cth)).

Effect of disclaimer of land

Practically speaking, the State becomes the registered proprietor of disclaimed land, subject to any subsequent Court order for the vesting of that land in other parties. In New South Wales, the Registrar General is able record the State of New South Wales as the proprietor of disclaimed land.

The land will remain subject to any charges and mortgages despite the change in proprietor. However, in order to enforce a mortgage after land has been disclaimed, a lender may need to take advantage of the provisions in the Bankruptcy Act which allow for vesting orders to be made.

Enforcing a mortgage over disclaimed land in New South Wales

In NSW, the Real Property Act 1900 outlines the process to enforce a mortgage of a registered lease which has been disclaimed.

However, there is no equivalent provision or guidance in the legislation for the enforcement of a mortgage over land in NSW which has been disclaimed.

The initial consideration for a lender looking to enforce its mortgage over disclaimed land in NSW is whether the Registrar General will accept a "transfer by mortgagee under power of sale", being the transfer form which is lodged with the land title office on settlement of a mortgagee sale.

In the usual course, a lender is entitled to enforce its mortgage and exercise power of sale if it has given the relevant notice to a mortgagor and the notice has not been complied with. When the lender comes to sell the property, the Registrar General will accept a transfer by mortgagee under power of sale, and the land will become registered in the name of the purchaser.

However, the Registrar General may not accept a transfer by mortgagee under power of sale if it has become aware that the land has been disclaimed. This appears to be because the State has become the registered proprietor and, on one view, a lender may not be entitled to issue a power of sale notice to the State where the State was not the borrower nor the mortgagor and has no obligations under the mortgage. Without a power of sale notice being properly issued, no power of sale would arise under the Real Property Act.

It may be necessary to first confirm whether the Registrar General is willing to accept a transfer by mortgagee under power of sale at settlement of the lender's sale of the disclaimed land. If a power of sale has arisen before the disclaimer, the Registrar General may be more likely to accept a transfer by mortgagee under power of sale.

Do lenders need vesting orders to sell the disclaimed land?

If the Registrar General will not accept a transfer by mortgagee under power of sale, the lender may need to apply to the Court for an order that the land vests in the lender (s 133(9) of the Bankruptcy Act). This would allow the lender to sell the property as the registered proprietor.

The proceeds of the sale would be applied as directed by the Court, and the Court is likely to give those directions having regard to the provisions in the Real Property Act for the application of proceeds following a mortgagee sale.

Commercial arrangements between trustees and lenders?

Trustees are understandably keen to disclaim onerous property where by doing so they are discharged from personal liability in relation to the disclaimed property.

However, it's important to remember that the disclaimer can be made at any time, and that the discharge of personal liability operates:

• as from the date the property vested in the trustee (being the date of bankruptcy, not the date of the disclaimer); and
• even if the trustee has taken steps to sell, taken possession or exercised any act of ownership.

Accordingly, a trustee may be comfortable delaying any disclaimer of land in order to contact the relevant lender /mortgagee for the purpose of exploring a commercially suitable arrangement.

The most likely reason that a trustee will disclaim property as quickly as possible is to avoid the ongoing costs and time involved in managing the land as part of the bankrupt estate.

As we've outlined above, any disclaimer could have a considerable impact on a lender's enforcement of its mortgage and cause potentially significant additional costs and delay. This is particularly concerning where disclaimed land by its very nature is more likely to result in a shortfall situation when sold.

For these reasons, trustees and lenders should consider the option of entering into commercial arrangements allowing for the prompt sale of the land without any disclaimer, including a situation where a lender may cover a trustee's costs incurred as a result of not disclaiming the land.

Checklist when dealing with disclaimed land

Set out below is a checklist of the issues that lenders and trustees should consider when dealing with onerous land:

• Has the trustee complied with the notice requirements for the disclaimer of the land?
• If the land hasn't been disclaimed, can the lender and trustee enter into a commercial arrangement for the sale of the land without any disclaimer?
• Did the lender's power of sale arise before or after the property was disclaimed?
• Has the State become the registered proprietor?
• What is the Registrar General's attitude towards the lodging of a transfer by mortgagee under power of sale?
• Is it necessary to approach the Court seeking an order that the property vests in the lender for the purposes of a sale?

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