The parents of a developer gave a mortgage and guarantees (limited to $2m) over their home to enable their son to refinance a $25m residential home unit development which the father was helping construct and the lender sought to enforce the parent’s mortgage and guarantee. The lender said to the solicitor acting for the development company that he could independently advise the parents as the advice “need only be brief and independent of the lender”.
The husband and wife raised separate defences. The husband argued that he was not liable on the guarantee unless and until all the assets of the development company had been fully realised, that the lender engaged in statutory misleading and deceptive and also unconscionable conduct by representing that it would not require personal guarantees in the early stages of negotiations, unjustness under the Contracts Review Act and that it was unconscionable of the lender not to enforce alternative security available to it. The wife argued that the mortgage and guarantee were unconscionable, were procured under the undue influence of her son, and unjustness under the Contracts Review Act.
The court rejected the husband’s claims with respect to the lender’s late change of position requiring personal security because this was a reasonable response to a change that occurred during the negotiations from the outgoing bank (namely its late claim for legals and contingencies) and the fact it became increasingly apparent that the loan was high risk. The court also rejected the husband’s claim that the lender was obliged to liquidate the company’s assets first because this had been done regardless and there was no alternative security available to it. The court also rejected the husband’s claim that the contract was unjust.
In regards to the wife, the court found that the wife left all financial decisions to her husband and signed documents he requested without enquiry and this had been the position throughout 58 years of marriage. (she was 81 at the time she signed the mortgage and guarantee). The court found that while she knew what a mortgage was, having signed mortgages on a number of previous occasions, she had no idea of the magnitude of the risk of default and signed the documents because she was asked to do so by the son and/or husband, who were operating as a team. The court found that while the developer son and father knew that the company’s position was desperate, they did not convey that to the wife. The court found the solicitor’s advice wholly inadequate, superficial and incomplete at best because it did not explain the transaction, the consent to legal advice from a partisan solicitor (acting for the development company) or the declaration as to independent legal advice. The court found that it would be unconscionable to enforce the guarantee against the wife, based upon the following:
- The wife did not understand the transaction;
- The wife was a volunteer, as she stood to gain no personal benefit from the transaction;
- The wife trusted her husband and son and the lender was taken to know this;
- The lender did not itself take steps to explain the transaction or ensure that an independent solicitor had explained it to her. The court found that the lender knew that the solicitor who did advise the wife was acting for the development company whose interest was in securing the loan and knew that the loan was extremely high risk. That placed the solicitor in a position of impossible conflict of interest. The court found that the lender’s statement to the solicitor that the advice need only be brief and independent of the lender only, not the development company, showed that the lender had no reason to believe that competent, independent and objective advice was given and entirely undermined the protection it had sought for itself.
The court also found the guarantee and mortgage unjust under the Contracts Review Act, so far as the wife was concerned but not the husband, because he was an experienced businessman, involved in the project, aware of the financial position and potential consequences of the guarantee and mortgage.
This case serves as a reminder to lenders not to undermine the protection afforded by the borrower’s declaration as to independent legal advice by having the solicitor acting on the advance to the company to also give the independent legal advice to the wife.