The Courts approach to considering a borrowers application for relief from “unjust” loan agreements

The recent decision of Bendigo and Adelaide Bank Ltd v Karamihos [2014] NSWCA 17 has clarified the weight given to and factors considered by the Court in determining whether a mortgage was “unjust”.

In Bendigo, the bank advanced $1.2 million secured by a mortgage over an elderly Greek couple’s home. The borrowers had been operating a restaurant/take-away food business for about 27 years. The purpose of the loan was to “raise additional funds for investment purposes”.

The borrowers had reasonably extensive mortgage history, having executed nine mortgages over their home between 1992-2004.

The borrowers started defaulting and the bank commenced proceedings for possession of their home. The bank successfully got judgment and the borrowers commenced separate proceedings contending that “the loan contract and mortgage over their home were unjust” for the purposes of section 76(1) of the National Credit Code and section 7(1) of the Contracts Review Act.

Pursuant to the Act, the Court has significant powers to either refuse to enforce, declare it void, or vary a loan or mortgage. Similarly, under the Code the Court has the power to re-open a transaction if it is satisfied that a contract or mortgage was “unjust”. 

Alarmingly, the decision by the primary judge in Bendigo found in favour of the borrowers and relieved them from their liabilities to the Bank. In this case, the Lenders advanced the loan because the borrowers had extensive business experience, their assets outweighed their liabilities, they had strong credit history, the loan was secured against the properties. Yet the judge found for the borrowers and discharged their liabilities to the lender. 

The judge relied heavily on the fact that their borrowing history had not been in their interests, drawing the conclusion that they had a lack of financial acumen. The exit strategy was the sale of their commercial property, and the lender did not get it valued. The judge placed considerable weight on that failure, as it ought to have been clear that the borrowers would retire and the only prospect of repayment of the debt was to sell that property. Those factors together with their age, background and lack of financial / legal advice resulted in an unfair loan. 

However, Lenders can breathe a sigh of relief as commonsense has prevailed in the Court of Appeals decision. The factors considered on appeal did not support the conclusion of the primary judge’s finding that the loan and mortgage were unjust.

The Court considered the bank was not required to ensure borrowers obtained independent legal or financial advice, as it was clear they “understood the basic elements of their responsibilities” (at [60]). In addition, Court had regard to the fact there was no history of default under prior loans and the borrowers clearly had financial acumen as they have successfully conducted a business for over 20 years. The Court found the borrowers’ decision to lease the commercial property, rather than selling it, contributed to their later difficulties. The Court held it would be inappropriate to relieve the borrowers of payment obligations to the lender, as they derived a benefit from the mortgage as it discharged previous mortgages and $100,000 from the loan proceeds was paid to their daughter.

For the reasons above the bank was given possession of the property and judgment for the amount owing to it.

 

This latest decision provides clarity about the considerations and weight a court will give factors when determining whether to grant relief on grounds of an unjust contract or provisions. Importantly, it overturns the earlier decision that would have caused uncertainty for lenders. 

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