Alan owns a small business. In February 2020 the business took out a loan for $824,000. Alan and his stepmother Maria were guarantors of the loan and the loan was secured by first mortgages over both Alan and Maria’s homes. The loan was interest only and for a one-year term, through to February 2021, when it was intended that the business would repay the loan principal. For the one-year term of the loan, the business would pay monthly interest instalments.
In December 2020 Alan approached the lender and sought an extension of the loan term to February 2022. He had paid all the instalments, but wanted more time to pay back the loan principal. The lender agreed to the extension, and the new loan principal was $849,000 which included new lender and brokerage fees. Unfortunately, the business did not keep up its payments.
In January 2022, the business asked for a further term extension. The lender only approved a three-month extension through to May 2022.
In May 2022, the lender did not agree to any further extension, and the full loan balance became immediately due ($880,000). The lender also informed Alan that they intended to issue a Property Law Act (PLA) notice so that they could mortgagee sale his property. However, on 19 May 2022 the lender informed Alan that if he could immediately reduce the loan principal by $100,000, and if he agreed to his lawyer receiving service of a PLA notice by email, they would defer issuing the notice meaning the debt would not have to be fully repaid until 10 August 2022. The $100,000 payment was made, and Alan agreed to his lawyer accepting service by email.
The lender issued the PLA notice on 9 June 2022, by serving it on Alan’s lawyer via email (copying in Alan). The debt needed to be paid in full by 10 August 2022. The debt was not paid by that date and, in early September, the lender started the process of selling Alan’s home. Even though the property’s capital value was $590,000, the estate agent gave a sale price estimate of ‘from $300,000’. This was because there were some water ingress and retaining wall issues, and because Alan did not give access to his property. The estate agent scheduled an auction for 2 November, and started marketing Alan’s house for sale from 12 October.
On the day of the auction, 2 November, Alan’s lawyer told the lender that he’d been able to secure a conditional loan offer from another lender to repay the debt. About 15 minutes before the auction started, Alan’s lawyer also sent the estate agent and the lender an unconditional sale and purchase agreement for Alan’s property. The agreement was undated, and said the purchase price was $867,000, with no deposit payable. The settlement date was 40 working days from the date of the (undated) agreement.
However, the auction proceeded, and Alan’s home was sold for $400,000, with a settlement date of 2 December 2022. The house sale agreement included a clause saying that if the vendor (the lender) was unable to complete the sale of the property, then they could cancel the sale agreement. As at 2 November, the debt balance was $892,000.
Alan then complained to FSCL saying that the lender had not followed the correct process in selling his property, and that they should cancel the sale agreement.
Dispute
Alan’s view was that the auction should have been cancelled because he had both a loan offer from another lender, and an unconditional sale and purchase agreement from a third party who was willing to pay $867,000 for his property. Alan also said that the payment of $100,000 he made in May 2022 was a forward payment of interest to the lender and that, under section 118 of the PLA, not enough time had passed for his property to be sold. Lastly, he said the PLA notice was not properly served.
Conversely, the lender said that they did not receive any ‘credible repayment option’ before the auction, so they proceeded to sell Alan’s home. However, the lender said that if Alan could repay the loan in full by 1 December 2022, they would cancel the sale agreement on his home. The lender also considered they’d achieved the best price for Alan’s property; it had sold for more than the estate agent’s estimate. They also said they’d properly served the PLA notice, and that section 118 of the PLA was not relevant in Alan’s case.
Review
We said that Alan’s complaint should be discontinued. Overall, there was no dispute that full repayment of the debt was significantly overdue, and it had to be repaid. Because this was a business loan, the responsible lending provisions of the Credit Contracts and Consumer Finance Act 2003 (the CCCFA) did not apply. We said:
- Alan had not provided sufficient evidence that he had secured a loan from another lender to repay the debt. The finance offer was unsigned, and the lender had the right to say they needed further information to confirm that the finance offer was legitimate.
- In relation to the unconditional offer to purchase Alan’s property, it was reasonable for the lender not to accept the offer, and to continue with the auction. This was because Alan had not signed the offer, and it was for an amount significantly higher than the estate agent’s estimate. The offer was for almost exactly the amount of the outstanding debt, no deposit was payable, the agreement was undated, and the offer was only put forward 15 minutes before the auction.
- The lender had taken sufficient steps to obtain the best price for Alan’s property. There had a reasonable marketing plan and the property had sold for more than the estate agent’s estimate of ‘from $300,000’. Generally, when there is a mortgagee sale, and the property sells for less than the capital value, this does not necessarily mean the best price has not been achieved. In this case, there were risks for the purchaser because they could not view the property before they purchased it. Further, there were some water ingress and retaining wall issues with Alan’s property which affected the price achieved.
- The PLA notice was valid. We looked at section 118 of the PLA which says that if a borrower continues to pay interest, and the lender has let the mortgage ‘run on’, then the loan cannot be called up unless 60 working days’ notice has been given. However, in Alan’s case, his payment of $100,000 in May 2022 was clearly made as a principal reduction, not a payment towards further interest, and the lender had not allowed the mortgage to run on. Rather, they had declined to further extend the loan term. Also, it was clear that Alan had received the 9 June 2022 email attaching the PLA sent to his solicitor, and Alan had agreed in writing to service being executed in that way.
Resolution
We could not uphold Alan’s complaint. We did not hear from Alan again, and the sale of his home proceeded on 2 December 2022. We then closed our investigation. With the sale proceeds of Alan’s home not being enough to repay the debt, the lender then started action to sell his stepmother Maria’s home.
Insights for consumers
This case shows the risks of personally guaranteeing business loans and using a family home as security. Unfortunately, the fact that Alan’s business was unable to repay the debt to the lender had major ramifications – his home was sold, and his stepmother’s home was also at risk of sale.
Consumers should bear in mind that business loans are not consumer credit contracts and responsible lending obligations do not apply to business loans, even if the borrower has given security over their home.
