Banks and farmers now required to talk it over ‒ compulsory mediation introduced in Queensland for farm mortgages

The Queensland Parliament passed the Farm Business Debt Mediation Bill 2016 (Qld) on 21 March 2017, which is to commence on 1 July 2017.   

The Act was passed so to implement one of the key components of the Rural Assistance Package flowing from the report of the Rural Debt and Drought Taskforce published last year -  a legislated farm business debt mediation process, which requires all providers of rural credit in respect of a "farm mortgage" to offer primary producers access to farm debt mediation prior to the relevant creditor commencing enforcement action. 

A "farm mortgage" is defined to mean a mortgage of farm property - "farm property" is defined to encompass both land on which a farmer carries on a farming business, and a water allocation under the Water Act 2000 (Qld) held by a farmer for carrying on a farming business.  "Farming business" is also defined by the Act to mean:

• an agricultural, apicultural, dairy farming, horticultural, land-based aquacultural, pastoral, poultry keeping or viticultural business;
• a business that involves cultivating the soil, gathering crops or rearing livestock; or
• a business that involves cutting timber for sale; and
• any other business prescribed by regulation to be a farming business.

Whilst there was a set of guiding protocols in place that recommended farm debt mediation, which form part of the Queensland Farm Finance Strategy implemented in 1996 by the Queensland Farmers Federation and the Australian Bankers' Association, participation was not compulsory and not all providers of rural credit tended to refer to it as a real option.  The Act does not stop farmers from resolving issues informally with banks or seeking to resolve the dispute by other means; however, the mortgagee is prevented from taking enforcement action unless:

• the Act (following commencement)does not apply to the farmer or the farm mortgage; or
• an exemption certificate is in force for the farm mortgage. 

The Act defines a "farmer" to be a person that satisfies any one of the following critieria:

• a person whose sole or main business is a farming business;
• a person who is the owner of land the subject of a sharefarming agreement; or
• a person who has applied for (and is eligible) for a loan under a program administered by the Queensland Rural and Industry Development Authority (previously the Queensland Rural Adjustment Authority) (Authority) for finance so as to establish a farming business. 

The Act specifies that the legislation does not apply to farmers where:

• the farmer is a bankrupt.
• the farmer is the subject of a petition presented by a creditor, other than the mortgagee, under a bankruptcy law.
• for a farmer that is a corporation—the farmer is an externally-administered body corporate under the Corporations Act 2001 (Cth).
• the farmer and the mortgagee have previously taken part in mediation for a farm business debt under the Act; and
• the farmer and the mortgagee entered into a contract, mortgage or other document to give effect to a heads of agreement entered into as a result of the mediation, and the farmer defaults under that further agreement.

A mortgagee can apply to the Authority for an exemption certificate regarding the mediation requirement under the Act.  In order to obtain the certificate, the creditor must satisfy one of the grounds provided under the Act, which include things like a failure on the part of the farmer to attend a planned mediation.  On their face, however, the grounds appear quite difficult for a creditor to satisfy. There is also a fee payable for an application for the certificate.  

Before taking the relevant enforcement action, a creditor is required to serve an "enforcement action notice" on the farmer and on the Authority.  This notice must state that the farmer may request mediation of the debt and allows 15 business days for that request to be made.  The farmer is then to provide to the creditor a request for mediation notice.  The mediator is able to either accept or refuse the request for mediation, however:

• if the farmer requesting mediation is not in default under the farm mortgage and the creditor refuses the request, then there is no consequences for either party under the Act.
• if, however, the farmer is in default under the farm mortgage, the creditor's refusal provides grounds for the farmer to apply to the Authority for an "enforcement action suspension certificate".

If a farmer applies for such a certificate, the Authority is to provide to the creditor a "show cause" notice that requests reasons for the refusal to mediate.  Whilst the creditor is able to provide reasons for its refusal, the Act states that the Authority must approve the application if it is satisfied that the farmer is in default, has provided a request for mediation to the creditor, no exemption certificate is in force, and the creditor has failed (and does not intend to) mediate.  As such, the system is slanted heavily against allowing creditors to refuse to attempt to resolve the issue by way of mediation.

Where a mortgagee takes enforcement action in violation of the requirements of the Act (following commencement), that action is taken to have no effect, and there is a maximum penalty of 100 penalty units.  

The Act defines "mediation" as follows:

 " …1 or more meetings conducted by a mediator to facilitate discussion between the farmer and the mortgagee—

(a) when the farmer has defaulted, or is at risk of defaulting, under the farm mortgage; and

(b) that aims to bring about an agreement between the farmer and the mortgagee about 1 or more matters relating to the farm business debt."

The appointed mediators must be accredited by the Authority.  Accreditation requires that the relevant applicant has sufficient knowledge about, and experience in, primary industries, business finance and financial management.  The Authority is to maintain a register of the accredited mediators, which is expected to be published on the Authority's website.  The costs of the mediator are to be split equally between the parties to the mediation, with the parties to pay their own costs.

In terms of reviewing decisions made by the Authority concerning exemption certificates, the aggrieved party is to first apply to the Authority for an internal review, and then to the Queensland Civil and Administrative Tribunal.

How will this impact upon mortgagees?

It is important to note that the Act defines a "farm mortgage" and "farm property" so as to only encompass mortgages given over land and water allocations as opposed to finance for farming activities more generally.  Accordingly, loans for   tractors and machinery, stock, irrigation and other farming equipment will not be affected by the legislation moving forward.  This is an important distinction to be aware of as the equivalent legislation in New South Wales (the Farm Debt Mediation Act 1994 (NSW)) covers security over farming equipment and similar; such matters are covered by the Credit (Rural Finance) Act 1996 (Qld), which contains no mediation requirement.

In terms of its practical effect, following commencement the Act may in fact encourage mortgagees to give formal notice of enforcement action perhaps earlier than they would have prior so as to save potentially going through the mediation-type process twice.  The catalyst for the delivery of an enforcement action notice requires only that the mortgagee "intends to take enforcement action under a farm mortgage".  On the terms of a standard mortgage, this would only require that the relevant mortgagor be in default.  Rather than engaging in potentially protracted discussions with the farmer, it may be more efficient to simply serve an enforcement action notice and start the mediation process under the Act once it commences.

In order to ensure compliance however, it may be prudent for regular providers of farm mortgages to ensure that a copy of the approved form of enforcement action notice is incorporated into the relevant materials used to give notice of a default under a mortgage so as to cover off any risk of taking action without having complied with the requirements of the Act once it is in force.  Service of such a notice then starts time running for a farmer to give their request for a  mediation notice; should the farmer fail to give such a notice, this will provide a ground upon which to apply for an exemption certificate.