On the eve of retirement from the Bench, Justice EM Heenan has delivered a judgment with potential to cause serious concern for lenders, and their intermediaries, who engaged in ‘Low Doc’ lending or unconscionable lending. His Honour’s opening sentence seems to sum up the decision:
Who would lend more than $840,000 to a couple, each of whom was on a disability pension with no prospects of any form of employment, with the husband partially blind and the wife with a long-term disability, when each had nothing to offer but the desire to speculate in real estate?
The following is a very, very shorty summary of the case:
The First and Second Defendant were husband and wife. Neither of them worked and they were in receipt of disability pensions. Mr & Mrs Burns decided to speculate in the property market. They did this by purchasing properties with the view of renting them out. They received six loans over a period of time.
By April 2011, Mr & Mrs Burns had defaulted on the loans and eventually proceedings were commenced for possession of the mortgaged property.
His Honour found that both Mr & Mrs Burns had significant handicaps, that there were serious doubts as to their ability to fully or adequately comprehend the transactions they were entering into.
There was also the involvement of various intermediaries. Those intermediaries lodged a number of loan applications on behalf of of Mr & Mrs Burns. It seems that in relation to some of the intermediaries, when indicating their appointment status they listed Mr & Mrs Burns as property investors. Most of those applications were refused but somewhere approved.
The employee of one of the main intermediaries gave evidence that he did not consider that it was his role to provide any financial advice or seek any information about the details of the income received by Mr & Mrs Burns. He justified this position on the basis that the facility they were seeking was a ‘low doc’ or asset lend loan, which meant that if the borrowers had sufficient equity their income was not required to be disclosed. However, this employee was well aware that Mr & Mrs Burns were in receipt of a pension and did not have any business of their own and were not full-time investors.
Hi Honour identified that one of the central questions was whether any of the intermediaries could be an agent of the lender or whether the intermediaries’ knowledge should be attributed to the lender in the circumstances.
His Honour referred to the judgement of Murphy JA in Permanent Mortgages Pty Ltd v Vandenbergh (which was a very similar case). His Honour concluded that the question of agency and/or attribution of knowledge by an alleged agent will depend on many factors and the consideration of the transaction and history of doing as a whole rather than any one determinative fact or test.
His Honour accepted the evidence from Mr & Mrs Burns that when they were dealing with the intermediaries they thought, at all times, that they were dealing with the lender or its agents. After reviewing the totality of the facts, including looking at the number of loans between the lender and Mr and Mrs Burns over a period of time, His Honour considered that the knowledge held by the intermediaries was held by them as agents of the lender and must be attributed to the lender.
The above findings were made despite an express term which expressly excluding an agency relationship – his Honour found that the signatures on those documents were more ritualistic than real.
The mortgage and loan agreement was set aside. The five (5) earlier loans and mortgages were also set aside.
The lender argued for the principal to be re-paid with interest. This arises from a line of authority that when a security is set aside, there is a requirement for the repayment of that which was paid in return for the security: see Maguire v Makaronis (1997) 188 CLR 449, 475.
His Honour considered that as the transaction was set aside ab initio (or from the beginning), there is no contractual entitlement to interest (or legal costs). However, his Honour still considered that it was appropriate that the principal sum be repaid together with simple interest at the cash rate set by the Reserve Bank from time to time. That would be, in his Honour’s view, appropriate and neccessary to do equity between the parties.
The amount of interest allowed by his Honour will be calculated and set-off against what was actually paid to the lender (in respect of all of the loans) by Mr & Mrs Burns. It would appear likely that the lender will have to make some sort of refund to Mr & Mrs Burns in respect of that interest.
A further counter-claim for damages for misleading and deceptive conduct arising from an October 2007 loan and mortgage was adjourned to be heard at a later date.
All-in-all a big win for Mr & Mrs Burns.