Several recent Lavan Legal publications have looked at unfair contracts and the operation of the National Credit Code (NCC).1 Following in that tradition, this update addresses a recent case2 in which a residential loan agreement was held to be “unjust” for the purposes of both section 76(1) of the NCC and section 7 of the Contracts Review Act 1980 (NSW) (CRA).
The plaintiffs ran a successful café in Marrickville. They also owned business and residential properties in Marrickville and in Maroubra.
In May 2007 they entered into a loan contract with the defendant for a 25 year term for an amount of $1,200,000.
This loan was secured by a mortgage over their residential property.
So far so good?
Not quite. A number of other salient factors were at play, and to a large extent, appear to have been overlooked or finessed by a combination of the plaintiffs’ mortgage broker and the defendant’s loan officer. These included the following facts (among others):
the plaintiffs were both in their 70s at the time the loan was entered into;
the plaintiffs had a “feeble”3 ability to read and understand written English;
the plaintiffs had a long refinancing history;
the financial information provided by the plaintiffs was unsigned;
the defendant bank knew the plaintiffs had not obtained independent legal advice; and
Moreover, the analysis undertaken by the bank’s officer indicated that his decision to fund the loan was predicated on an “exit-strategy”4 which required the sale of the Marrickville property based on a “piteously optimistic and unsupportable estimate”5 of the value of that property. The defendant bank obtained no independent valuation to support its analysis.
In 2008 the plaintiffs began to miss monthly payments, they were perpetually in default of their loan and their health was rapidly failing.
In April 2010 the plaintiffs retired from their business due to the aforementioned issues.
In September 2010 another lender obtained judgment for possession of the Marrickville property and subsequently sold that property.
In February 2011 the defendant repossessed the Maroubra property but later returned it to the plaintiffs subject to a “Re-entry Agreement”.
The NCC commenced on 1 July 2010. It applies to a contract even though the loan may have been entered into before that date.
Section 76(1) of the NCC permits the court to re-open a transaction if the court is satisfied it was “unjust” in the circumstances relating to it at the time it was entered into. In forming a view on whether a contract is “unjust” the court may have regard to a range of factors set out in section 76(2) of the NCC.6
It was found that there was an indubitable public interest in the protection of aged borrowers who do not know what is in their best interest, notwithstanding that the Court acknowledged a competing public interest in upholding contractual bargains between consenting parties.
In weighing up the factors for consideration under section 76(2) of the NCC – which the Court referred to as a “catalogue of prudence”7 - it was clear in this case that the catalogue had barely been opened.
The plaintiffs’ age, the prospect of ill health and natural onset of an inability or disinclination to continue working were significant factors that should have but failed to, inform the defendant’s approach to the loan contract.
In this case, the Court found both that the plaintiffs were “too elderly and foolish” to know what was in their best interests, and that a reasonable enquiry by the defendant into (among other things) the true value of the Marrickville property would have resulted in no loan at all.
Ultimately, the Court ordered the loan transaction be reopened, with the parties to agree on revised calculations as the “true” indebtedness of the plaintiffs.
Lavan Legal comment
This case is a fairly extreme example which illustrates how the “unjust contract” provisions of the cited legislation can be applied.
With the benefit of hindsight, it appears reasonably clear that the lending arrangements were inappropriate for the customers concerned.
Although this Court emphasised the age as the key consideration in this case, there are various other features of this case that might, cumulatively, have led to the same decisions - in particular those outlined above.
We note that the responsible lending requirements under chapter 3 of the National Credit Act, which took effect in January 2011, impose an even higher standard on lenders to learn more about the circumstances of their prospective customers.
Therefore, lenders should approach new loans with a spirit of well documented caution and prudence.