A mortgage is, by its very nature, a form of security taken
over land. If the mortgagor defaults, the mortgagee bank is
entitled to take possession of, and sell, that land. A
question can arise as to exactly what is included in "the
land". It has long been understood that fixtures to the
property, that is, any buildings, fences, gas pipelines and so
on, form part of the land, and therefore form part of the
mortgaged property. It is not permissible, therefore, for a
mortgagor to, for example, remove the fence without the
consent of the mortgagee since they have an interest in the
property. In a recent case run by Jackson Smith, a bank was
attempting to obtain possession of a farmer's property
pursuant to a mortgage which it had over the property. The
farmer owned a valuable irrigation licence which was
transferred to the family trust without the bank's consent.
The bank sought to argue that the irrigation licence formed
part of the "land" and therefore was part of the mortgaged
property.
The case ended up settling, and so we do not know what the
court would ultimately have decided.
However, the following principles should serve as useful
guidelines for farmers who own irrigation licences and are
wondering whether the bank has rights to their licence:
First, check the exact terms of the mortgage document. Some
mortgages actually define what is included as part of the
mortgaged land.
For example, the current standard memorandum of mortgage
used by the Commonwealth Bank includes the following clause:
The expression Mortgaged Property means:
A). the land mortgaged described in or indicated as such in
the Mortgage; and
B). all rights and privileges of the Mortgagor to enjoy the
property referred to in paragraph (a) of this clause
including, without limitation, all entitlements held under any
statute relating to the distribution and right to use water in
connection with that property.
Such a clause makes it abundantly clear that the irrigation
licence is included as part of the mortgaged property.
Many mortgages, however, will be silent on the issue. The
question then becomes whether it can be implied that the
irrigation licence is part of the land. In the case of Elders
Rural Finance Ltd v Westpac Banking Corporation (Supreme Court
of New South Wales, Justice Bryson, 6 November 1989) the court
considered this very question.
The issue is whether an irrigation licence is a personal
right of the person to whom the licence is issued, in which
case it would not form part of the mortgaged land, or is part
of the bundle of property rights which constitute land
ownership.
In that case, the judge held that, because the licence
could not be transferred separately from the land, it was a
right which could only be enjoyed in conjunction with
ownership of the land. Because it was inseparably connected
with the mortgaged property the judge found that the licence
was subject to the bank's mortgage.
It appears that some irrigation licences, however, can be
transferred separately to the property. In some instances, a
co-operative scheme is formed by various land owners who
together obtain a joint water authority from the government.
Within that scheme, the owners then decide how they will
distribute their allocation of water to members of the scheme.
There can be quite a lucrative trade in those water
allocations between members of the scheme. In such instances,
ownership of the irrigation licences is essentially
transferred separately to the ownership of the land over which
the irrigation licence was originally held.
It might be possible to argue that in such cases, the
irrigation licence is therefore a right which is held
independently from ownership of the land, and is therefore a
personal right to the owner separate to the land. The result
of this would be that the licence does not fall within the
mortgage.
It should be noted that this argument has not yet been
tested by the courts, and anyone who wishes to assert such an
argument should seek legal advice before doing so.
>> COMMONSENSE BANKING - NEGOTIATING A
DEAL
Farmers often borrow large sums of money from banks and
other financiers. The ability to repay such loans are
generally dependant on seasonal crops that only come around
periodically. When major events such as drought disrupt a
crop, a farmer's ability to repay a loan is compromised and
banks are likely to get nervous. However, with some carefully
thought out negotiation, your relationship with your bank can
be maintained.
Banks work on a simple plan - lend money out and watch
money come in by way of interest. Despite what we might think,
banks do not like possessing and selling your farm assets
because that requires work and costs money. Therefore, in
times of difficulty, banks are generally keen to do a deal
rather than rush off to court. What are some simple rules to
follow when structuring a deal that is acceptable to both you
and the bank?
Commit to a regular schedule of repayment. The actual
amount of each repayment need not be that great, but it must
at least be something. Nothing makes a bank more nervous than
not getting any money at all.
If things are really difficult, seek a grace period during
which repayments are delayed. Use this time to arrange your
finances to meet the repayment schedule. The more you are able
to show that some sort of financial stability will arise in
the future, the more likely you are to get a longer grace
period.
Be prepared to sell assets. It is better that you sell
assets and you set sale prices rather than having some
bank-appointed receiver step in. Banks are likely to be
impressed by any ability to generate a short-term cash
injection without a need for their intervention.
Speak the bank's language. Often, a deal is made or broken
based on not on what the deal actually is, but how the deal is
stated. State that despite the drought, you are ready and
willing to pay back your loan, but that you need a little
understanding by the bank in order to tide yourself over the
drought period.
Do not speak too much on the difficulties of farming and
the hardship of the bush. Banks are more sensitive to their
obligations to shareholders than the problems of farming life
- otherwise they would be a farming corporation not a
financial institution. What a bank understands is how and when
money should be repaid, so this is the point on which to keep
focussing.
Despite the difficulties caused by the drought, the cold
reality is that loans, sooner or later, must be repaid.
However, with some careful negotiation, you can structure a
compromise deal to ensure your financial stability, buy you
some time and also ensure that the bank is properly paid out.
Negotiations with banks should focus on this simple
common-sense approach to financing so as to achieve long term
viability for farmers.
>> FARM DEBT MEDIATION ACT
A key factor in the life of farmers in New South Wales has
been the Farm Debt Mediation Act and the benefits that have
accrued from that legislation.
If the loan involves a farm mortgage then the provisions of
the Farm Debt Mediation Act will apply. The purpose of the Act
is to provide farmers with an opportunity to participate in a
mediation concerning farm debts before a creditor can take
possession of property or other enforcement action under a
farm mortgage.
The Act provides that enforcement action taken by a
creditor to whom the act applies otherwise than in compliance
with the Act is void. "Enforcement action" means the taking of
possession of property under the mortgage or any other action
to enforce the mortgage, including the giving of any statutory
enforcement notice, or the continuation of any action to that
end already commenced. It should be noted that a farm
mortgage, to which these provisions apply includes a hire
purchase agreement relating to farm machinery, but does not
include a stock mortgage, a crop or wool lien or a lease of
farm machinery.
To comply with the Act, a creditor must give a notice in
writing informing the farmer of the creditor's intention to
take enforcement action in respect of the farm mortgage and of
the availability of mediation. This notice is called a Section
8 notice. The creditor must not take any enforcement action
against the farmer until at least 21 days have elapsed after
the Section 8 notice was given.
If a farmer is served with a Section 8 notice and wishes to
have a mediation, then the farmer must give notice in writing
(called a Section 9 notice) to the creditor requesting a
mediation within 21 days after the Section 8 notice is given.
It is vitally important that this be done within time
otherwise the farmer will lose any right to insist on a
mediation. The mediation must then be held within three months
of the Section 8 notice being given.
The creditor can commence enforcement action against the
farmer once the Rural Assistance Authority gives a Section 11
certificate in respect of the farm mortgage. The Rural
Assistance Authority must issue such a certificate if it is
satisfied that:
A). Satisfactory mediation in respect of the farm debt
concerned has taken place. The meaning of "satisfactory
mediation" was considered in the case of Gain v Commonwealth
Bank of Australia (1997) 42 NSW LR 252. In that case the
farmers and the Bank had held a mediation, but no agreement
was reached at the mediation.
The farmers sought to argue that there had been no
"satisfactory mediation" within the meaning of the Act and
therefore the Section 11 certificate issued by the Rural
Assistance Authority was unlawful. The court said that a
"satisfactory mediation" means a mediation which has proceeded
as far as it can.
The outcome may be either resolution of the dispute or the
reaching of a stage where the mediation has broken down. It
was said that the object of the Act is not to force people to
settle their disputes but to give them an opportunity to do so
by establishing a procedure to be followed.
B). The farmer has declined to mediate in respect of
the farm debt.
C). Three months have elapsed after the Section 8
notice was given and the creditor has throughout that period
attempted to mediate in good faith.
Once the Section 11 certificate is issued the creditor is
free to commence enforcement action against the farmer. The
certificate remains in force for 3 years
The Act has a number of things to say about the conduct of
the mediation itself:
The function of the mediator is to mediate impartially or
attempt to mediate impartially between the farmer and creditor
for the purpose of arriving at an agreement for the present
arrangements and future conduct to financial relations among
them.
The mediator is not, however, to advise either party about
the law, or encourage or assist either party in reserving or
establishing legal rights, or to act as an judicator or
arbitrator.
The mediation itself is to be conducted with as little
formality and technicality, and with as much expedition as
possible.
The rules of evidence, which apply in court, do not apply
to the mediation.The mediation is not open to the public,
although the farmer's advisor and any other person permitted
by the mediator, may be present.
A farmer is entitled to have present at the mediation an
advisor, who may but need not be legally or otherwise
professionally qualified, and is entitled to call upon that
person for advice and counsel.
What occurs during the mediation is confidential.
Anything said during the mediation or any document prepared
for the mediation is inadmissible in court.
Further, there are penalties which apply if a person
discloses any information obtained in a mediation sessions,
with a number of exceptions.
Any agreement reached at a mediation will usually need to
be recorded in writing. Mediations can often continue late
into the night and the farmer may feel under pressure to sign
the agreement. A recent amendment to the Act provides
additional protection to farmers by allowing a two week
cooling off period during which the farmer can give written
notice rescinding any written agreement entered into at the
conclusion of the mediation. If a written agreement has been
entered into, the Section 11 certificate can not be issued
until the cooling off period has expired.
