The brokerage agreement contained a charging clause that read as follows:
In consideration of the Lender approving the Loan to the Borrower, the Borrower hereby agrees to pay the structuring fee to KWS Capital Pty Ltd and hereby specifically charges their interest in the properties to secure payment of the structuring fees and costs to KWS Capital Pty Ltd.
The borrower argued that no loan was ever approved because the loan was stated to be the lesser of the amount required or 55% of the current market valuation. As it turned out, 55% of the current market valuation was less than the amount required. In the alternative, the borrower argued that other references to the broker negotiating an approval and advance meant the fee was not payable unless the loan actually went ahead.
The judge found that the broker’s argument was very weak (but not necessarily hopeless) none the less he decided that because the broker’s argument was so weak the caveat the broker had lodged had to be removed.
Brokers need to tighten up their mandates if they want them to survive scrutiny of the courts. This means making it very clear under what circumstances their fees are payable and also ensuring that they specifically factor in overly optimistic estimates of valuations given by borrowers. That way if the valuation does not stack up they can still recover.