What Is a Mortgagee Sale in New Zealand? A Complete Guide

A mortgagee sale occurs when a borrower defaults on their mortgage and the lender exercises their legal right to sell the property under the Property Law Act 2007. It is one of the most significant moments in the property market cycle, affecting borrowers, lenders, and buyers, and understanding how mortgagee sales work is essential for anyone involved in New Zealand property.

Mortgagee sales are a regular feature of the New Zealand property market, especially in times of economic uncertainty. These sales follow a specific legal process, involve particular risks for borrowers, and create opportunities for buyers who understand what they are buying. This guide explains the complete picture:

• What mortgagee sales are
• Why they happen
• The legal framework that governs them
• Who gets involved

By the end, you will have a thorough understanding of mortgagee sales and how they work in New Zealand.

Why Do Mortgagee Sales Happen?

Mortgagee sales occur when a borrower fails to meet the terms of their mortgage agreement. The most common trigger is falling behind on mortgage payments, but there are others:

• Arrears on mortgage payments. The primary reason. If a borrower misses multiple payments, the lender may exercise the power of sale.
• Breach of other loan conditions. Mortgages contain covenants beyond just making repayments. A borrower might breach the agreement by failing to maintain insurance, or by allowing the property to fall into disrepair.
• Significant negative equity. If the property value drops sharply and the borrower owes more than the property is worth, a lender might move to sell in order to mitigate their losses.
• Receiver appointment. In cases of serious financial distress, a company or trust might appoint a receiver, who then sells assets (including property) to settle debts.

From the lender's perspective, a mortgagee sale is a tool of last resort. Before exercising the power of sale, responsible lenders typically work with borrowers to restructure loans, defer payments, or find alternative solutions. A mortgagee sale is expensive and time-consuming for the lender as well as the borrower, so both parties usually prefer to avoid it if possible.

The Mortgagee Sale Process Step by Step

Here is what typically happens in a mortgagee sale in New Zealand:

1. Default occurs. The borrower falls behind on payments or breaches another term of the mortgage.
2. Formal notice is served. The lender sends a formal notice under the Property Law Act 2007, typically giving 20 working days for the borrower to remedy the default (pay arrears or fix the breach).
3. If not remedied, power of sale is exercised. The lender instructs an agent (a real estate company) to market and sell the property. At this point, the property will be advertised as a mortgagee sale.
4. Marketing campaign. The property is marketed through all standard channels: online property portals, the agent's website, signboards, email campaigns, and often press releases. The campaign typically runs for four to six weeks.
5. Sale process. The property may be sold by auction, by tender, by deadline sale, or by negotiation, depending on the lender's strategy and market conditions. Auction is the most common method in New Zealand.
6. Settlement. Once sold, settlement takes place according to the terms of the sale.
7. Distribution of proceeds. After settlement, the sale proceeds are distributed. First, the lender's expenses and legal fees are deducted. Then, the principal loan amount is repaid. If there is a surplus, it goes to the borrower. If there is a shortfall, the borrower may remain liable for the difference (depending on the nature of the loan).

This process typically takes three to six months from the time default occurs to the time settlement happens, though it can vary depending on market conditions and how quickly the property sells.

What Does "As Is, Where Is" Mean?

One of the most important concepts in mortgagee sales is "as is, where is." This phrase appears in mortgagee sale agreements and describes the condition in which the property is being sold.

"As is, where is" means that:

• The lender makes no promises about the property's condition. Unlike a standard residential sale where the vendor warrants that chattels are in working order, a mortgagee lender does not warrant anything about the building condition, compliance, or fitness for purpose.
• No chattels are included in the sale. The lender does not own the contents of the property, so no chattels are included or warranted as part of the sale.
• No vacant possession is guaranteed. In some cases, the former owner or tenants may still be occupying the property. While the lender's solicitor typically manages this process, vacant possession is not guaranteed in the way it would be in a standard sale.
• The property is sold in its current condition, with all faults. If the building has structural issues, if fixtures are broken, or if the property requires remediation, that is the buyer's responsibility.
• The lender may have limited knowledge of the property. The lender does not own the property and may never have visited it. Any information about the property's condition is limited.
• Conditions depend on the method of sale. For auction properties, buyers cannot add conditions and must complete all due diligence before auction day. However, with post-auction negotiations or other methods of sale, conditions may be included subject to approval by the vendor (the mortgagee).

This means mortgagee sale properties require especially thorough due diligence before purchase. Where possible, buyers should commission building inspections, engage specialists for known issues, and have their solicitor carefully review the sale agreement. For some mortgagee properties, access for inspection may not be possible (due to the previous owner still occupying the property or other circumstances), in which case buyers must factor additional risk into their budget and rely on other sources of information such as LIM reports and council property files.

Who Is Involved in a Mortgagee Sale?

Several parties have a role to play in a mortgagee sale:

• The mortgagee (lender): The bank or finance company that holds the mortgage. They initiate the sale and set the terms. Major lenders in New Zealand include the major banks and various non-bank lenders.
• The mortgagor (borrower): The owner of the property who has defaulted on the mortgage. They have the right to be notified, to remedy the default, and to receive any surplus after the sale.
• The real estate agent: The lender appoints an agent to market and sell the property. This is typically a real estate company with experience handling mortgagee sales.
• The solicitor (for the lender and buyer): The lender's solicitor prepares the sale agreement and title documents. The buyer's solicitor reviews the agreement, checks the title, and advises on any issues.
• The auctioneer (if sold by auction): If the property is sold by auction, an auctioneer runs the auction sale on the day.
• The buyer: The person or entity purchasing the property. Buyers in mortgagee sales range from owner-occupiers to experienced property investors.

Frequently Asked Questions