The recent New South Wales Court of Appeal decision of Provident Capital Ltd v Papa  NSWCA 36 provides guidance in relation to the Court’s position on the obligations placed on both lenders and solicitors in relation to lending practices. In their decision, Justices Allsop, Macfarlan and Sackville found that there had been negligence on the part of the solicitor providing advice to the borrower and ordered that the solicitor pay damages to his client. The decision also sets out circumstances in which a contract will not be considered unjust, particularly in the context of “low doc” lending.
On 5 April 2007 Mrs Papa mortgaged her home to Provident Capital. This mortgage was security for a loan of $700,000.00 and a further advance of $125,000.00.
Provident Capital required Mrs Papa to obtain independent legal advice in regards to these loans and the security documents. She did obtain this advice from a solicitor, Mr George Caramanlis.
Upon Mrs Papa’s default Provident Capital brought proceedings against her for recovery of possession of her property. She disputed this action, claiming firstly that the contract was unjust under the Contracts Review Act 1990 (NSW) and secondly that Mr Caramanlis was in breach of his professional duty to her.
At first instance it was held that the contract was unjust and that Mr Caramanlis was not negligent, however subsequently both these decisions were overturned on appeal.
In the primary decision it was found that the contract was unjust on the basis that it was “asset lending”. This term was introduced by the decision of Perpetual Trustee Company Limited v Albert and Rose Khoshaba  NSWCA 41 and refers to lending just on the basis of the security provided and failing to have regard to the ability of a borrowers to service the loan.
In the appeal however it was stated at paragraph 113 that the fact that a financier appears not to have shown interest in the borrower’s ability to service the loan, “…must be assessed in the context of all the circumstances surrounding the loan”.
The Court held that the circumstances that should be considered when evaluating whether the lender has properly considered the borrower’s ability to repay the loan, include:
- the financier’s knowledge of the borrower’s circumstances;
- the purpose of the loan; and
- whether the borrower has obtained independent legal advice.
The Court went on to comment that it may in fact be in the public interest to allow financiers to lend on a “low doc” basis without the expenditure of time and effort in assessing the ability of borrowers to meet repayments.
The Court held that, “…if a financier is satisfied that a borrower is able to make the decision for him or herself or has received appropriate advice…”, then this is enough to satisfy the interests of the public.
In this case Provident Capital had received signed declarations stating that Mrs Papa could make the repayments and had undertaken credit checks which the Court said demonstrated Provident Capital was not “completely unconcerned” in regards to her ability to make repayments.
Independent Legal Advice
The Court found that Mr Caramanlis had breached his duty to Mrs Papa and had subsequently caused her loss based upon his negligent advice in relation to the loans.
It was held that whilst, “…solicitors are not ordinarily required to advise upon the wisdom of transactions in relation to which they act…”, in this case Mr Caramanlis did not act reasonably.
The Court of Appeal stated that a reasonable solicitor would have stressed to her that by entering into these transactions her business and home could potentially become endangered.
The Court found that Provident Capital was entitled to assume that Mrs Papa had obtained reasonable legal advice and held that even though the legal advice was inadequate this was not the financier’s fault. Orders were then made that Mrs Papa was liable to Provident Capital and Mr Caramanlis was liable to Mrs Papa.
Issues for lenders
This finding highlights that when assessing if a loan arrangement is enforceable a Court will consider if a financier has taken prudent steps when entering into the contract, such as:
- Putting in place a procedure where a signed declaration is obtained from the borrower stating that they are able to meet repayments; and
- Ensuring the borrower obtains independent legal advice and provides a certificate to this effect; and
- Undertaking some assessment of a borrower’s ability to repay, which in a “low doc” environment might be standard credit checks.