In circumstances where a seller is anxious to close a deal, private lenders can be more enticing than the ‘big four’ banks. The recent case of DCZ Early Learning Pty Ltd v Semper Mortgage Management Pty Ltd[1] considered whether certain terms contained in loan documents (and an Indicative Letter) were ‘unfair’.
Background
In late 2023, DCZ Early Learning Pty Ltd (DCZ) entered into an agreement to purchase part of a childcare centre business. Eager to settle before Christmas, DCZ’s finance broker engaged Semper Mortgage Management Pty Ltd (Semper) on the basis that they were prepared to lend the funds before Christmas.
On 8 December 2023, DCZ signed an Indicative Letter of Offer (the Offer) for a loan of $2.4m and a commitment fee of $5,500.00. Following execution of the Offer, both the purchase and loan were progressed by personal guarantees from the second to fifth applicants. Semper also obtained valuations of the two properties offered as security for the loan by way of second mortgages. Consistent with assumptions that DCZ were getting cold feet, Semper instructed its solicitors to lodge caveats and PPSR registrations for their fees on the basis that the loan may not proceed. DCZ contended that execution of the Offer did not constitute a legally binding loan agreement and requested a refund of the search and valuations fees in the sum of $8,800.00. In response to the refund request, Semper issued a demand for $366,260.00 for the fees payable under the Offer.
The Offer
Rather than persisting with a claim that the Offer did not constitute a legally binding contract, DCZ sought a declaration that clauses 8 and 9 (the Clauses) of the Offer (which dealt with the applicants’ liability for fees) were unfair and therefore void.
The Clauses had the effect that upon acceptance of the Offer, DCZ was liable to pay Semper ‘all fees, costs and disbursements’ outlined in the document, irrespective of whether the transaction proceeded, together with a personal security for payment of the fees. It is important to note that even if the Clauses were declared void, the provisions specifying payment of fees would survive.
In response, Semper counterclaimed for a sum of $150,260.00 comprising of the Debt Provider Fee, the Legal Fees, the Broker Fees, the Establishment Fee and Administration Fee.
Legal Issue
The Court’s assessment of a standard term contract
DCZ relied on the suggested definition within the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) which sets out that a term of a consumer or small business contract is void if three conditions are met:
- the term is unfair;[2]
- the contract is a standard term contract;[3] and
- the contract is a financial product or a contract for the supply of financial services.[4]
The ASIC Act is silent on what a standard form contract is, however, it sets out that a Court may consider any matters it deems relevant, but must take into consideration the following:
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- whether one of the parties has all or most of the bargaining power relating to the transaction;[5]
- whether one of the parties has made another contract, in the same or substantially similar terms, prepared by that party, and, if so, how many such contracts that party has made;[6]
- whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties;[7]
- whether another party was, in effect, required either to accept or reject the terms of the contract;[8]
- whether another party was given an effective opportunity to negotiate the terms of the contract;[9]
- whether the terms of the contract consider the specific characteristics of another party or the particular transaction;[10] and
- any other matter prescribed by the regulations.[11]
The ASIC Act also provides guidance as to the intended meaning (in addition to the six factors outlined above) of a standard form contract despite the existence of one or more of the following:
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- an opportunity for a party to negotiate changes, to terms of the contract, that are minor or insubstantial in effect;[12]
- an opportunity for a party to select a term from a range of options determined by another party;[13] and
- an opportunity for a party to another contract or proposed contract to negotiate terms of the other contract or proposed contract.[14]
Bargaining Power
The Court considered whether Semper, as a private lender had ‘all or most’ of the bargaining power which led to the execution of the Offer. In making its assessment, the Court referred to the fact that there were five versions of the Offer and extracts from the affidavit of a representative of DCZ’s broker which illustrated negotiations between the parties.
Semper willingly accommodated some of DCZ’s requests to alter the terms of the Offer and this was not suggestive of either party having command of the negotiations. The fourth iteration of the Offer was not accepted by DCZ, and their broker conveyed the following amendment requests, all of which were accepted by Semper:
- proceeding with two second-ranking mortgages;
- total loan amount of only $2,400,000.00 inclusive; and
- removal of a limited guarantee to charges befitting a shareholding.
The Court noted that it was rare for a contract to be drafted without adopting any boilerplate clauses and was unwilling to accept any argument that the mere inclusion of standard terms within the Offer implied that Semper held all or most of the bargaining power.
Pre-preparation of contract
The ASIC Act requires the Court to consider whether the Offer was prepared by Semper before any discussions relating to the transaction occurred. Given that the first iteration of the Offer was prepared following discussions with DCZ’s broker, this indicated the terms were negotiated.
Accept or Reject?
The Court concluded there was no evidence suggesting that Semper presented DCZ with the terms of the bargain on a ‘take it or leave it’ basis and noted that the fact that a party holds out for one specific term is not generally illustrative of one-sided bargaining power.[15]
Opportunity to Negotiate
The Court acknowledged that not only did DCZ have an opportunity to negotiate but ‘took advantage of that opportunity and, through its broker, sought and obtained adjustments to the bargain’[16], which is not suggestive of a standard form contract.
Specific Characteristics
The Court commented that the Offer was an amalgam[17] and whilst it incorporated standard or boilerplate provisions likely to appear in most loan transactions entered into by Semper, this was not evidence of an inequality of bargaining power.
Meaning of ‘unfair’
Unfair Contract Terms
The Court reviewed the Offer with regard to the definition of ‘unfair’ within the ASIC Act and considered whether the Clauses caused a significant imbalance in the parties’ duties and rights under the Offer. The Court made the following assessments:
- the effect of the Clauses did not perform to create an imbalance in consideration that a nominal amount was immediately payable and secured as fees;[18]
- in the absence of an industry benchmark, it is difficult to determine a reasonable level of fees immediately payable on account of security for a private lender’s fees (in this instance, $150,260.00 in a transaction of roughly $2.4m); and
- the significance of the imbalance with respect to the interest component for the term of the loan is also difficult to discern in the absence of an industry standard (in this case interest for the first six months and 12-month term were $216,000.00 and $432,000.00 respectively).
What is ‘reasonably necessary’?
The Court questioned whether the Clauses were reasonably necessary in order to protect the legitimate interests of Semper, with regard to consideration of the particular circumstances of the business, affirming that Semper had a legitimate interest in ensuring it was not out-of-pocket for their time, effort and expenses. In determining the same, the Court noted that fees are not always charged at hourly rates and may be calculated as a percentage of the Offer. Interestingly, the Court delivered its judgment with reference to the urgency of the Offer at [76]:
‘Again, there is no evidence that suggests that the fees are unreasonable or beyond what it is regularly charged by equivalent private lenders for a similar relatively urgent short-term loan.’
Key Takeaway
The judgement serves as a reminder that private lenders may be able to charge fees for urgent transactions at their discretion, and if the borrower cannot establish that they fall outside of the range of what is reasonably necessary to protect the lender’s interest and cause an imbalance of such significance, it will not be considered unfair under the ASIC Act.