Is there a recent Australian court decision finding lenders negligent?

Three non bank lenders recently sued a valuer for negligence in its valuation of properties being offered as security for a proposed loan. The claim came about because the valuer valued the proposed secured property at $3.6 million, in circumstances where the market value was in fact approximately $1.75 million. The primary judge found that the valuer was indeed negligent. However, he also found that the lenders themselves were negligent and reduced the claim by 25%.

In what may well be another nail in the coffin of asset-based lending, in an unanimous judgment, the Full Court of the Federal Court in South Australia confirmed (Valcorp Australia Pty Ltd v Angas Securities Limited [2012] FCAFC 22) that although the valuer was negligent in its valuation, the lenders were also negligent on the basis that they failed to carry out proper inquiries about the proposed borrower's ability to service the proposed loan. 

The valuer (Valcorp) argued on appeal that if the Lenders had made proper inquiries about the proposed borrower's financial position, the loans would not have been made. In those circumstances, the lenders were 100% responsible for the loss. 

The Full Court decided that the lenders and the valuer were equally responsible, and reduced the claim by 50% on the basis of contributory negligence. 

The decision highlights the growing judicial trend to frown on asset-based lending, leaning to a policy requirement that lenders take appropriate steps to ensure that their loans will be serviceable.

W G Stark 
Hayden Starke Chambers

Is asset-based lending doomed in Victoria and Australia?

There appears to be a growing judicial trend to frown on asset-based lending, tending towards a policy requirement that lenders take appropriate steps to ensure that their loans will be serviceable.

Several New South Wales Court of Appeal decisions have held that asset-based lending in circumstances where a borrower has no possibility of repaying the loan may be unconscionable (see Elkofairi v Permanent Trustee Co Ltd (2003) 11 BPR 20,841; (2003) Aust Contract R 90-157; [2002] NSWCA 413; Perpetual Trustee Co Ltd v Khoshaba (2005) 14 BPR 26,639; [2006] NSWCA 41; and Kowalczuk v Accom Finance Pty Ltd (2008) 77 NSWLR 205; (2008) 252 ALR 55; (2008) 229 FLR 4; (2008) 14 BPR 26,565; [2008] NSWCA 343). 
 
In Victoria, in Butler v Vavladelis [2012] VSC 186, the borrowers sought to set aside a judgment for possession of the security property on the basis that they had an arguable defence to the mortgagees' claim for possession of the property. Hargrave J in the Victorian Supreme Court rejected a defence based on an allegation that the borrowers' signatures on the mortgage were forged, because there was no evidence that the lenders were a party to any alleged forgery.

However, His Honour accepted the argument that asset-based lending (without the lender considering the borrower's ability to repay the loan) may amount to unconscionable conduct. On that basis, His Honour found that there was an arguable defence, and accordingly he set aside the judgment for possession (on certain conditions). 

It seems odd that a defendant has no defence to a mortgagee's claim for possession based upon an allegation of fraud unless the fraud is committed by the mortgagee (consistent with many years of authority about indefeasibility of title), and yet can potentially defeat a mortgagee's claim for possession based upon what has until recently been viewed as legitimate lending practice. 

W G Stark 
Hayden Starke Chambers

When will the latest amendments to the Sale of Land Act, 1962 (dealing with off-the-plan contracts) take effect?

Thank you to Stephen Wilcox, solicitor, for pointing out that the further deferral of the proposed amendment to s.9AA of the Sale of Land Act 1962 (Vic) (requiring that certain notices be put on the front of off-the-plan contracts of sale, introduced by the Consumer Affairs Legislation Amendment (Reform) Act 2010 (Vic)). 

The amendment has not yet been proclaimed. 

The start date for this Act (unless provisions were proclaimed earlier) was initially 1 September 2011, then 30 June 2012 and is now 1 December 2012.

The latest change to the start date was made by Australian Consumer Law and Fair Trading Act 2012 (Section 239, Schedule 6, item 9.1).

W G Stark
Hayden Starke Chambers