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Are the finance terms materially different from those in the mandate?

In 2015, Caleb contacted FSCL about a complaint against his commercial finance broker. The broker obtained a finance offer for Caleb to purchase a property. Caleb intended to sub-divide and develop (the development property). The broker was seeking payment of his brokerage fee of $23,500.

Caleb considered the fee too high because:

a)               He did not actually take up the offer of finance

b)               the terms of the finance offer were not reflective of the terms he sought, as set out in a mandate between him and the broker, and

c)               he considered the work undertaken by the broker did not justify a $23,500 fee.

Caleb said he was placed under pressure to sign the finance offer because it was only presented to him the day before he was due to settle on the purchase of the development property. Because the loan offer terms were different from those in the mandate with the broker, Caleb was under pressure to find an offer from another lender within a short time period. Caleb did obtain an offer from another lender on more favourable terms, although he incurred penalty interest of $4,300 on the delayed purchase.

The mandate

The mandate set out the finance terms the broker was going to seek, being:

–                  Finance amount: $1,440,000.

–                  Term – 1 year, interest only.

–                  Indicative interest rate of 10-11%.

–                  Lender’s fee up to a maximum of 2%.

–                  Security – first mortgage on the development property, and a personal guarantee from Caleb.

–                  An administration fee of $2,000 plus brokerage at 1.5% of the amount financed.

The mandate also said that upon an offer of terms being presented, the full brokerage fee of $23,500 was due and payable.

The offer

–                  Finance amount: $1,678,000

–                  Term – 8 months from the date of the advance. There was an option to extend the term by 2 months, for an additional 1% fee.

–                  Interest rate of 12%.

–                  Finance fee of $65,000 due on acceptance of the offer and in the event the loan did not proceed.

–                  Security sought was the mortgage over the development property, and Caleb’s personal guarantee. In addition, there was additional security to be taken by way of:

  • mortgages over two other residential properties Caleb owned
  • a guarantee from Caleb’s limited liability company
  • a guarantee from Caleb’s family trust
  • a general security agreement over all present and after acquired property of Caleb and the guarantors
  • assignment of the agreements for sale and purchase of the lots at the development property, and
  • any other such security from Caleb and his associated entities the lender may consider necessary.

The broker’s view

The broker considered the full $23,500 fee was payable once an offer was presented to Caleb, and said it was not unusual for a loan offer’s terms to differ from those originally sought by a borrower. In addition, the broker said that, ultimately, Caleb had signed the mandate and the offer.

The broker said he was not late in providing the offer and had worked hard obtaining the offer based on disorganised information provided by Caleb in ‘dribs and drabs’. The broker felt he went the extra mile to seek an offer of finance for Caleb, including assisting in the pre-sales of four sections. In addition, the broker said he had to do more work because Caleb lacked experience in this type of deal, and because of Caleb’s financial position.

The broker also said Caleb had originally sought finance of $1.4M, however in reality the finance required was close to $1.7M once lender, brokerage, and legal fees were included, which significantly increased the risk for the lender.

Our investigation

We looked at all the correspondence between Caleb and the broker. We showed that Caleb and his broker had first been in communication in late June 2015 about seeking the finance. The broker emailed Caleb and asked him for various pieces of information to enable the broker to seek the finance, including valuations, the sale and purchase agreements, contractor and supplier quotes, a statement of financial position, and the signed mandate.

On 1 July 2015, Caleb provided all the required information to the broker. There was no further contact between the broker and Caleb until 9 September 2015, when Caleb sent the broker evidence of deposits being held in relation to the pre-sales of 3 lots at the development property.

It was only on 21 September 2015 that the broker was first in contact with the lender, with settlement set for 30 September 2015.

Our view

We considered Caleb should make a contribution towards the broker’s fee, based on the actual time the broker spent on securing the finance offer. Our overall view was that because the terms of the offer differed considerably from those in the original mandate, the broker had not met the mandate requirements.

In addition, because the offer was only presented the day before settlement, Caleb was placed in a stressful and difficult position.

However, we considered Caleb had to bear that the $4,300 penalty interest cost because he could have taken steps to have a back-up finance option in place.

The factors relevant to our decision were that:

a)               The security sought from Caleb differed significantly from the security he originally agreed to provide in the mandate. The lender’s ability to seek any further security it saw fit also seemed to be a very wide power.

b)               A difference in the lender’s fee of $31,440 was not insignificant.

c)               The lender wanted an 8-month term, not a 12-month term.

d)               Accepting the broker’s argument that Caleb was inexperienced, the broker could have done more at the time the mandate was signed and between July 2015 and late September 2015 to explain that:

  • there would likely be broker, legal, and lender’s fees to factor in
  • the security noted in the mandate was unlikely to be sufficient
  • a lender may not agree to a 12-month term
  • it may be difficult to find finance on the terms originally sought, in particular when it became known to the broker that the number of lot pre-sales was likely insufficient. If Caleb had known this he could have worked on securing more pre-sales.

e)               Caleb had not provided information in ‘dribs and drabs’; he had provided information as the broker had asked for it.

f)                The broker should have been in contact with lenders to seek indicative loan offers earlier than 21 September 2015 which was only 8 days prior to settlement. There were conditions attached to the loan offer which, if obtained earlier, Caleb could have discussed with his solicitor much sooner.

g)               As far as Caleb was concerned, it appeared there was no impediment to him obtaining a finance offer on the terms he sought by the date of settlement. At the same time, Caleb could have followed up with the broker between July 2015 and September 2015 to seek an update on progress.

We reviewed all the correspondence between Caleb and the broker and considered it fair and reasonable for Caleb to pay the broker for 25 hours of work at $300 per hour, being $7,500 (including about 5.5 hours of telephone calls). We formally recommended Caleb pay $7,500 in full and final settlement of the broker’s fee and the complaint, and that the broker write off the remainder of his fee.

Our insight

In this complaint, the broker argued it took him well in excess of 25 hours to secure the finance offer for Caleb. A major impediment to us finding in the broker’s favour was that there was a lack of file notes to prove that more than 25 hours was expended. File notes of actions taken by a financial service provider can be vital evidence if a complaint is received and investigated.