ASCF Funding Solutions Pty Ltd v SL Property Maintenance Pty Ltd

1. [1]

   By Summons filed 17 October 2024, the Plaintiff, ASCF Funding Solutions Pty Ltd, seeks an order that the Defendant pay to the Plaintiff the sum of $255,145, as well as a declaration that the Plaintiff has an equitable interest in certain land in Vaucluse.

2. [2]

   The Plaintiff contends that the right to payment and the alleged charge arise from the terms of a Letter of Offer of Finance that was dated and signed by the Defendant on 11 September 2024 (‘Letter of Offer’).

3. [3]

   The Letter of Offer included provisions concerning various fees, including an Establishment Fee.

4. [4]

   For reasons I will come to, the Letter of Offer did not lead to a loan facility and no finance was given by the Plaintiff to the Defendant.

5. [5]

   The proceedings raise three main issues:

   1. (1)

      whether the express terms of the Letter of Offer require the Defendant to pay the Establishment Fee and other fees;

   2. (2)

      if so, whether there is an implied term that has the effect that the fees cannot be recovered from the Defendant; and

   3. (3)

      if not, whether the fees cannot be recovered because they are penalties.

6. [6]

   For the reasons set out below, I have concluded that none of the claimed fees are payable under the express terms of the Letter of Offer. In those circumstances, the Plaintiff’s case fails.

7. [7]

   Had I come to the conclusion that on the proper construction of the express terms of the Letter of Offer the fees are payable, I would not have found that there is any relevant implied term that applies and would not have found that the fees are penalties.

Terms of the Letter of Offer

1. [8]

   The Letter of Offer includes a number of relevant provisions. It opens with the following:

2. [9]

   The Letter of Offer records that the proposed loan amount was $11.2 million and the term was to be six months.

3. [10]

   There is a section in the Letter of Offer concerned with Valuation, which provides:

4. [11]

   The Letter of Offer includes a number of specific conditions, including the following:

5. [12]

   There is a section that addresses fees and charges. Within that section there is a box that states as follows: “Unless otherwise stated all fees are non-refundable. These fees may be payable even if the loan does not proceed for any reason.” Next to that box is a table that identifies various fees. It includes the following (among other fees):

6. [13]

   There is a section headed “Disbursement Summary” that provides “how the amount you borrow will be disbursed at settlement”. There is a table that sets out the deductions applied to the Gross Loan Amount to reach the approximate net amount due on settlement, as shown below:

7. [14]

   The Letter of Offer also provides for a “direction to proceed” as follows:

8. [15]

   The Letter of Offer recorded that the way to accept the offer was to sign and return the letter and also by paying the “upfront fees”, being the Valuation Fee of $4,400.00.

9. [16]

   It was common ground that the Letter of Offer had contractual force.

The failure to provide or obtain finance

1. [17]

   The Letter of Offer was accepted by the Defendant, SL Property Maintenance Pty Ltd, on 11 September 2024.

2. [18]

   Following acceptance of the offer, the Plaintiff took some steps pursuant to the agreement. In particular:

   1. (1)

      it completed a Verification of Identity;

   2. (2)

      it completed the relevant credit checks, undertook company searches, rapid ID and title searches; and

   3. (3)

      it instructed an agent to attend the Vaucluse property to conduct a valuation.

3. [19]

   When the valuer attended the premises on 14 September 2024, entry was refused. The valuer was informed that a mortgage held by N1SY Pty Ltd and N1 WH2 Pty Ltd (‘N1 Mortgage’) was in default.

4. [20]

   The uncontested evidence is that the Plaintiff was ready and willing to proceed with the proposed loan but for the N1 Mortgage default, or the failure to disclose the status of the N1 Mortgage. The Plaintiff contends that it withdrew the offer on the basis that the property was not as disclosed in the application.

5. [21]

   The Defendant contends that there was no relevant non-disclosure on its part.

6. [22]

   On 16 September 2024, the Plaintiff lodged and registered a Caveat on the title of the Vaucluse property.

7. [23]

   Through its solicitor, on 1 October 2024, the Plaintiff issued a letter of demand (‘Letter of Demand’), claiming the amount of $255,145.00, made up as follows:

   1. (1)

      Application Fee - $595.00

   2. (2)

      Establishment Fee - $246,400.00

   3. (3)

      Solicitor Fee (incl disbursements) - $5,950.00

   4. (4)

      Legal Fees of preparing this demand - $2,200.00.

8. [24]

   On 3 October 2024, the Plaintiff’s solicitors, received a Notice to Caveator of Proposed Lapsing of Caveat from the New South Wales Land Registry (‘Lapsing Notice’). On 14 October 2024, the Plaintiff issued a further letter to the Defendant in response to the Lapsing Notice, placing them on notice that they intended to make a Court application to seek orders extending the Caveat’s operation.

Construction of the Letter of Offer

1. [25]

   There was no dispute in this case about the relevant principles of contract construction. The Plaintiff drew particular attention to the following principles. First, that the primary duty of a Court in construing a written contract is to endeavour to discover the intention of the parties from the words of the instrument, including the whole of the instrument: see Zhang v BM Sydney Building Materials Pty Ltd [2016] NSWCA 166 at [41]-[42]. Second, every clause in the contract must be construed in context; a particular contractual clause or subclause must not be construed in isolation but as part of the contract as a whole: Inghams Enterprises Pty Ltd v Hannigan (2020) 379 ALR 196; [2020] NSWCA 82 at [57].

2. [26]

   The Plaintiff contends that the Letter of Offer, and in particular paragraph 3 of the direction to proceed, set out above, makes it clear that the obligation to make the payment of the fees was enlivened by the Plaintiff agreeing to take steps to establish the loan. It contends that it did start taking steps to establish the loan and, accordingly, the fees are payable.

3. [27]

   In my view, the words of paragraph 3 of the direction to proceed, by themselves, are not clear in specifying that particular fees are payable in circumstances where a loan is not established, as happened in this case. The words “proceeding with the establishment of the loan” could mean that the agreement to take the first steps with a view ultimately to establish a loan, so that an obligation to pay those fees (at some time) arises upon entry into the contract, or at latest when the Plaintiff took some step to establish the loan. Alternatively, they could mean that the Defendant agrees to pay those fees (at some time), provided the Plaintiff takes the relevant steps to establish the loan. The relevant steps will depend on the particular fee that is in question.

4. [28]

   I have concluded that when the Letter of Offer is read as a whole, paragraph 3 of the direction to proceed cannot be read as imposing an unqualified obligation to pay “the Application Fee, Establishment Fee, Solicitors Fee, Valuation Fee, and all costs that may be reasonably incurred in connection with the loan” once the contract is made, or when some first step is taken to establish the loan. When the Letter of Offer is viewed as a whole, it seems to me that paragraph 3 of the direction to pay cannot be read as a promise to pay those fees merely by the execution of the contract.

5. [29]

   The Establishment Fee of $246,400.00 is described in the Letter of Offer as “a fee paid by you to us for approving the loan and arranging money for settlement”. This language indicates that the Establishment Fee is a fee for approving the loan and arranging money for settlement and supports the proposition that the fee will not be payable unless the Plaintiff approves the loan and arranges money for settlement. Neither of those things occurred.

6. [30]

   The “Application Fee” of $595.00 is: “a fee paid by you to us for assessing your application. This fee is paid on settlement”. The Plaintiff had not completed its assessment of the application prior to the failure of the Letter of Offer. There was no concluded assessment.

7. [31]

   I infer that the “Solicitor Fee” of $5,950.00 is made up of the Legal Document Preparation Fee and the Legal Disbursement Fee. There is evidence that the Plaintiff undertook some company searches and title searches. There is no evidence, however, that it incurred any legal fees in carrying out those searches. If there had been work performed by solicitors, then there could be an argument that those fees had become payable. However, I cannot come to that conclusion on the evidence.

8. [32]

   By way of contrast, the Letter of Offer makes plain that the Valuation Fee is to be paid “upfront”. There is no dispute that this fee was paid.

9. [33]

   The Letter of Offer provided the Plaintiff with broad opportunities to withdraw or extract itself from giving any finance. Thus, the Letter of Offer reserved to the Plaintiff the right to withdraw if the “loan-to-value ratio is exceeded based on the valuation reports”, although the letter does not specify any particular ratio. There is a condition (see condition D) that there is satisfactory due diligence of the borrower and guarantor and of the security at the Plaintiff’s “sole discretion”. It may be thought to be anomalous if the Plaintiff was able to withdraw having undertaken very little work (as is the case here) yet still recover the full Establishment Fee. This supports the construction of the express terms as imposing an obligation to pay the Establishment Fee only if the Plaintiff approves the loan and arranges money for settlement.

10. [34]

    The contract in this case may be contrasted with that considered by Henry J in Private Mortgages Australia Pty Ltd as trustee for PMA Trust v Stever [2019] NSWSC 462. The contract in that case provided for an “Originator Fee” and “Legal/Admin Fees” and expressly provided that: “If the loan does not proceed, you will remain liable to Private Mortgages Australia for the fees in accordance with this Letter of Offer”. Similarly, in Saeed v Capital Securities Australia Pty Ltd [2020] NSWSC 223, an “indicative letter of offer” stated: “Upfront Fees You agree to pay the lender 100% of the Establishment Fee and 100% of Legal Fee (Withdrawal Costs), even if the loan does not proceed to settlement (including because we withdraw from this offer)…”

11. [35]

    By way of contrast, the Letter of Offer does not anywhere provide that any fee (other than the Valuation Fee) will have to be paid even if the loan does not proceed to settlement. The Letter of Offer includes a provision that: “These fees may be payable even if the loan does not proceed for any reason”. The use of the word “may”, which is an expression of a possibility, suggests that it is necessary to look at the particular fee and other clauses in the contract to ascertain whether or not it would become payable, even if the loan did not proceed. An example of a fee that clearly would be payable on the express terms of the Letter of Offer, even if the loan did not proceed, is the Valuation Fee.

12. [36]

    In my view, the wording of the direction to proceed is insufficiently clear by itself to impose an obligation to pay any fees even if the loan does not proceed. When the direction to proceed is read with the other express terms, it seems to me that the only fee that the Defendant agreed to pay upon entry into the contract, being the Letter of Offer, was the Valuation Fee. The other fees were contingent. Most importantly, the Establishment Fee was contingent upon the Plaintiff approving the loan and arranging money for settlement: that is, the Establishment Fee was a fee for taking the steps required to establish the loan. There was no agreement by the Defendant to pay that fee even if the Plaintiff exercised some right to withdraw and no loan was established.

13. [37]

    In my view, on the proper construction of the Letter of Offer, none of the fees claimed by the Plaintiff ever became due and payable.

Whether there is an implied term

1. [38]

   Although it is not strictly necessary for me to do so, in view of the conclusion to which I have come, I will briefly address the two alternative arguments advanced by the Defendant.

2. [39]

   The Defendant contends that if the relevant fees are found to be payable on the express terms of the Letter of Offer, there is an implied term that has the effect that the fees cannot be recovered. The Defendant contends a term is to be implied that would have the following effect: “the Defendant’s liability for fees, other than fees identified in the fee schedule as being ‘paid up front’, is subject to the Plaintiff obtaining valuation and electing not to withdraw the offer”.

3. [40]

   The Defendant relied on the principles recently summarised by Kiefel CJ and Gageler J in Realestate.com.au Pty Ltd v Hardingham (2022) 277 CLR 115 at [18], as follows:

4. [41]

   The effect of the implied term contended for by the Defendant is similar to the effect of the express terms of the contract as properly construed (see above).

5. [42]

   If I had concluded that the relevant fees were payable on express terms of the Letter of Offer, I would not have found that there is an implied term that has the effect that the fees cannot be recovered. I would not regard such an implied term as being consistent with the express terms of the Letter of Offer, nor would the term be necessary to give business efficacy to the contract, nor would it be so obvious that it goes without saying.

Whether the fees are penalties

1. [43]

   The Defendant also contended, in the alternative, that if the fees are payable pursuant to the terms of the Letter of Offer, and there was no implied term, the terms requiring payment constitute a penalty and are unenforceable. The Defendant relied on Paciocco v Australia and New Zealand Banking Group Limited (2016) 258 CLR 525 and Australia Capital Financial Management Pty Ltd v Linfield Developments Pty Ltd [2017] NSWCA 99.

2. [44]

   In my view, the Defendant’s reliance on the penalties doctrine is misconceived.

3. [45]

   In Andrews v Australia and New Zealand Banking Group Limited (2012) 247 CLR 205, French CJ, Gummow, Crennan, Kiefel and Bell JJ stated at [9]-[10]:

4. [46]

   None of the fees that are claimed by the Plaintiff could be said to be collateral to a “primary stipulation”. They are all fees alleged to be payable as primary obligations arising from the Plaintiff agreeing to proceed to establish the loan. I agree with the analysis of Henry J in Private Mortgages Australia v Stever at [65]-[76], which concerned a similar set of circumstances.

5. [47]

   The Defendant submitted that in the decision of Melbourne Linh Son Buddhist Society Inc v Gippsreal Ltd [2017] VSCA 161, the Court of Appeal in Victoria concluded that an establishment fee was a penalty. However, the Court in that case was concerned with the question of whether the establishment fee was a penalty when it was claimed as compensation for breach of the Deed of Offer. Kyrou JA and Cameron AJA (Maxwell P disagreeing) in obiter remarks concluded that the establishment fee was a penalty because it bore no relation to any possible damage to, or interest of, the respondent arising from the putative breach of the contract and was not commensurate with any legitimate commercial interest of the respondent which was sought to be protected by the deed in the event of its breach: see [191]-[195]. The Plaintiff in this case is not claiming any of the fees as compensation for a breach of the Letter of Offer. Rather, the claim is for a debt.

6. [48]

   If I had concluded that the Defendant had agreed to pay these fees, they would not be unenforceable on the grounds that they are penalties.

Disposition

1. [49]

   The Plaintiff’s case fails because it has not established that any of the claimed fees are payable under the terms of the Letter of Offer.

Costs

1. [50]

   The Defendant seeks to be heard on costs. I propose to direct the parties to confer about the question of costs. If there is no agreement about final orders as to costs the parties should confer about appropriate directions that will enable the Court to rule on costs in an efficient way.

Orders

1. [51]

   The orders of the Court are:

   1. (1)

      The Summons is dismissed.

   2. (2)

      The order of 21 October 2024 extending the operation of caveat AU412251 will cease to have effect from today’s date.

   3. (3)

      The parties are to confer about the question of costs and are to advise my Associate as to the outcome of that conferral by 5pm on 2 April 2025.