GUARANTEE – WHETHER BANK OBLIGED TO ENSURE THAT GUARANTOR OBTAINED INDEPENDENT LEGAL ADVICE – WHETHER BANK LIABLE FOR FAILING TO COMPLY WITH ITS LEGAL OBLIGATIONS IN RELATION TO THE EXERCISE OF ITS FORECLOSURE RIGHTS UNDER A MORTGAGE
The Plaintiff (“the Bank”), brought proceedings against the Defendant, Elizabeth Ruth Kempe, to recover the unpaid portion of a mortgage debt that remained after the property was sold under the Bank’s foreclosure rights. The Defendant was Guarantor for the mortgage.
The Defendant counterclaimed against the Bank for negligently:
- selling at an undervalue based on a negligent valuation;
- failing to ensure that she received independent legal advice in circumstances where she was to the Bank’s knowledge under pressure from her divorce lawyers to enter into the Guarantee so as to settle with her ex-husband.
As part of a divorce settlement, the Defendant became the protector of a trust on which the property was settled, and guaranteed the full mortgage debt of $1,199,700 under a credit facility letter in 2004. An additional $100,000 was added to the mortgage in 2008, which the Defendant’s guarantee was extended to cover. The monies advanced were secured by Deeds of Further Charge over the property.
The trust defaulted on its mortgage payments in 2010 and in October 2012 the Bank obtained possession of the property. Having been valued at $1.45 million in late 2012, the property was sold in February 2014 for $1.2 million, leaving a deficit of $362,642 as of August 2014, with interest accruing at the rate of 6.5% per annum. The Bank brought proceedings against the Defendant in 2015 to recover this debt. The Defendant counterclaimed, as described above.
The Court noted that when the Defendant had assumed her obligations as guarantor of the mortgage in 2004, the property had been valued at some $2.4 million, twice the amount of the total mortgage debt. However, the global financial crisis resulted in a substantial decline in property values after 2008.
Governing legal principles
With regards to a mortgagee’s (i.e. the Bank’s) duties and liabilities, the judgment cited a number of cases including the following from Edness -v- Bank of Bermuda Limited  Bda LR 51 Ground J, who took the law from the following formulation by Salmon LJ in Cuckmere Brick Co. Ltd. & Anor. –v- Mutual Finance Ltd.  2 All ER 633 at 646:
“I accordingly conclude…that a mortgagee in exercising his power of sale does owe a duty to take reasonable precaution to obtain the true market value of the mortgaged property at the date on which he decides to sell it. No doubt in deciding whether he has fallen short of that duty, the facts must be looked at broadly and he will not be adjudged to be in default unless he is plainly on the wrong side of the line.”
Kawaley, CJ said he had not identified any authorities which support the proposition that the Bank was legally obliged to ensure that the Defendant as a guarantor actually sought (or expressly waived the right to seek) independent legal advice before executing the Guarantee. He said such an obligation is only recognised in the context of transactions giving rise to a presumption of undue influence, and clear evidence of vulnerability and influence would be required to impeach the validity of a contract where no presumed undue influence arises.