The need to get Consumer Credit Code declarations signed before the letter of offer

The NSW Court of Appeal has held a business purposes declaration signed several days before the mortgage documents were signed but several days after the signing of a non-binding ‘indicative letter of offer’ was not effective.

 

6 July 2008

On 26 June 2008 the New South Wales Court of Appeal in Bahadori v Permanent Mortgages Pty Ltd [2008] NSWCA 150, had to decide whether a business purposes declaration was effective when signed after the letter of offer. Section 11 of the Code sets out a number of presumptions relating to when the Code applies to a loan. Those provisions include:

(2)Credit is presumed conclusively for the purposes of this Code not to be provided wholly or predominantly for personal, domestic or household purposes if the debtor declares, before entering into the credit contract, that the credit is to be applied wholly or predominantly for business or investment purposes (or for both purposes).”

Pivotal to the dispute was whether the extended definition of ‘contract’ in Schedule 1 to the Code applied to s 11(2):

Contract includes the series or combination of contracts, or contracts and arrangements”.

At first instance, before the Consumer Trader & Tenancy Tribunal, the borrowers argued that the ‘indicative letter of offer’ they signed was a contract for the purposes of s 11 of the Consumer Credit Code basing their argument on the applicability of the extended definition.

The lender argued, and the Tribunal accepted, that the indicative letter of offer was not a contract because in the event that the lender declined to advance the amount of the loan, the borrower could not have forced the lender to advance the funds because the offer was expressed to be indicative only and the borrowers would have had to provide a valuation of the property which was satisfactory to the lenders and there was no way to define what was satisfactory.

The Court of Appeal formed the opposite view and decided in favour of the borrower noting:

“In these circumstances, the acceptance by the appellants of the letter of offer … resulted in a contract coming into existence whereby.. [the solicitor firm] warranted that it had authority from an undisclosed but identified lender to provide a loan of $52,000 in accordance with the terms of the offer. That contract was followed two days later by the tender … of the mortgage documentation … By executing those documents … there thereby came into existence a “credit contract” within the meaning of s 5 of the Code.

In these circumstances it cannot be gainsaid that there was other than a series of contracts or arrangements within the meaning of the extended definition of “contract”. It was not disputed that if the extended definition applied to the expression “credit contract” in s 11(1) and (2), then that contract came into existence… prior to the making of the s 11(2) declaration by the appellants.

In my opinion Conway’s submission that the extended definition of “contract” has no application to s 11 should be rejected.”

It follows that any contract which results in there eventually coming into existence a “credit contract” within the meaning of s 5 of the Code will nullify the effect of a UCCC business purposes declaration if it is signed prior to the declaration being signed.

Although the decision turned upon the ‘indicative letter of offer’ being a contract of sorts, the court left open the possibility a non-contractual document (such as an application form or a telephone inquiry from a finance broker) falls within the arrangements limb of the definition if it ultimately results in the formation of a credit contract. If this is the case it is difficult to see how any lender can effectively avail itself of the advantages of a business purposes declaration where a broker is involved.

If a broker makes contact with a lender to introduce a loan then under this interpretation the extended definition of the credit contract has begun and there is no way a business purposes declaration can be relied upon by the lender – no matter what steps are taken. This case accordingly severely curtails the ability of lenders to offer business purposes loans outside the code unless no broker is involved.

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