Farm Debt Mediation Act: Mortgage Lenders Must Adhere

farm debt mediation act

Farm Debt Mediation Act.

In Waller v Hargraves Secured Investments the High Court warned mortgage lenders of the need to adhere to the Farm Debt Mediation Act prior to taking enforcement action under a defaulting mortgage or loan agreement

The High Court of Australia allowed an appeal from a farmer regarding the validity of enforcement action taken by a lender. The decision is important in outlining the strict requirements for enforcing farm mortgage debts in New South Wales.

This article summarises the relevant provisions of the Farm Debt Mediation Act. It also considers the ramifications of the decision in the matter of Waller v Hargraves Secured Investments.

Farm Debt Mediation Act

The legislation has in mind the efficient and equitable resolution of farm debt disputes. Therefore the following sections must be considered by lenders wishing to take enforcement action.

Farm Debt Mediation Act

Relevant information

Section 4(1)

The Act defines “farm debt” as “a debt incurred by a farmer for the purposes of the conduct of a farming operation that is secured wholly or partly by a farm mortgage.”

A “farm mortgage” includes “any interest in, or power over, any farm property securing obligations of the farmer whether as a debtor or guarantor”

Section 8

This section specifies that no enforcement action can be taken until the creditor provides notice to the farmer of the availability of mediation

Section 9

Once provided with notice of the possibility of mediation, the farmer (within 21 days of the notice being given) can notify the creditor that mediation should commence concerning the debt involved

Section 11

Outlines instances where the Act does not apply to the farm mortgage.

For instance, the Authority must issue a certificate that the Act does not apply to the farm mortgage if the farmer is in default, no exemption certificate is in place and the Authority is satisfied that satisfactory mediation has occurred.

Timeline of the Facts

The decision in Waller v Hargraves Secured Investments highlights the importance of creditors understanding their rights and obligations regarding the Farm Debt Mediation Act. The issue was whether a certificate issued in relation to one farm debt could allow a creditor to take enforcement action in relation to another debt.

  • In August 2003, Ms Waller (the farmer) borrowed $450,000 from Hargraves Secured Investments Ltd (the lender) under an agreement (the first loan agreement).
  • Ms Waller’s farm was hit hard by drought. The lender alleged that she defaulted in the payment of interest in every month but four from February 2004 to July 2005.
  • In October 2004, the lender gave Ms Waller notice under s 8(1) of the Act that she had defaulted and that they intended to take enforcement action. Ms Waller requested that the parties begin mediation (under s 9(1)).
  • Following mediation, the parties entered into a further loan agreement (the second loan agreement). This new agreement increased the amount of the loan to $640,000 repayable along with any outstanding interest.
  • In August 2006 Ms Waller defaulted again, and the parties entered a third loan agreement.
  • In October 2006, there was a further default. Therefore the Authority issued the lender with a s 11 certificate. It was common ground that the certificate was issued on the basis that a satisfactory mediation had taken place.
  • Before the Supreme Court of NSW, the lender was successful in obtaining orders for possession of the farm and judgement for the outstanding debt.
  • The NSW Court of Appeal rejected Ms Waller’s appeal. Ms Waller then applied by special leave to have the case heard before the High Court.

The High Court’s Decision

The primary issue before the High Court was whether the enforcement action undertaken by the lender related to the same “farm mortgage” in respect of which the s 11 certificate was issued.

The High Court disagreed with the NSW Court of Appeal and allowed Ms Waller’s appeal for the following reasons:

  • Each of the Second and Third loan agreements discharged the preceding Loan Agreement. Therefore, at the date of the proceedings the only obligations secured by the registered mortgage were those found within the Third Loan Agreement.
  • The High Court found that the mediation and the subsequent certificate issued by the Authority related to the first loan agreement, not the third loan agreement. 
  • Therefore, the High Court found that no certificate had been issued by the Authority in respect of the borrower’s default under the third loan agreement. Consequently, the lender was prevented from taking any enforcement action against the borrower except in accordance with the Act. The lender’s submission for recovering the money judgment was also rejected. Justice Hayne stating “it follows that action to obtain a money judgement after the commencement of the Act is ‘enforcement action’ so long as it is action to enforce the mortgage”.

Final Comments

Mortgage and caveat lenders should always be cautious when lending against the security of property the subject of the act, both when entering into the loan facility to ensure that there is sufficient equity in the security property to cover the costs and accruing interest associated with complying with the Act, as well as if it becomes necessary to enforce its rights under a loan agreement or mortgage after an event of default has been committed. 

The High Court’s decision is a reminder to lenders about the stringent requirements of, and the need to adhere to, the Farm Debt Mitigation Act. Clearly, a mortgage lender’s ability to take enforcement action is subject to the Authority issuing a section 11 certificate relating to the particular farm debt being recovered.

The decision of the High Court may be read in full by following the link below:

Elliott May Lawyers specialise in all aspects of mortgage and caveat lending and enforcement, including preparation of offer documentation, loan agreements, mortgages, priority deeds, PPSA charges and guarantees, as well as issuing possession proceedings and facilitating the exercise of power of sale by mortgagees.

This publication is provided for your information and interest only. It is not intended to be comprehensive, and does not constitute and must not be relied on as legal advice. You must seek specific advice tailored to your circumstances.

Solutions. Not just advice