Huang and his wife, who are in their 80s, are minority shareholders of their daughter Mei’s small business. In February 2020, Mei’s business entered into a loan agreement to borrow $824,000. Mei and Huang were guarantors, and the loan was secured by mortgages against both Mei and Huang’s homes. Huang and Mei received independent legal advice before signing the loan documents.
The loan was interest only for 12 months, and then the principal needed to be repaid in full. The lender agreed in late 2020 to extend the loan for 12 months. In February 2022, the lender agreed to a final extension for 3 months to May 2022. When the loan principal was not paid in full in May 2022, the lender started Property Law Act (PLA) action to sell Mei’s and Huang’s houses.
The lender takes PLA action
In May 2022, the lender emailed Mei’s financial adviser saying they would defer issuing the PLA notice if Mei could pay $100,000 to reduce the loan, and if Mei and Huang nominated their lawyers as agents to receive the PLA notice. The adviser emailed back and said ‘agreed’, and the $100,000 payment was made. The PLA notice was emailed to Mei’s lawyer, and separately to Huang’s lawyer. However, the email went to Huang’s lawyer’s junk box.
Then, in September, the lender instructed a real estate agent to start the process of selling Mei’s property. By this time, the loan balance was approximately $880,000 but the agent estimated that Mei’s property would only sell ‘from $300,000’. Mei’s property then sold at auction for $400,000.
Huang discovers his property is being sold
In early November 2022, Huang discovered that the real estate agent had also started the process of marketing his property, and that it would be auctioned that month. The lender wanted to sell Huang’s home because the sale of Mei’s home did not pay off the debt, and Huang’s home would also need to be sold. Huang said however, that he had never given written permission for a PLA notice to be served on his lawyer by email. Also, because the notice had gone to his lawyer’s junk box, it was never actually ‘received’. In other words, Huang had no knowledge that the PLA notice had been served. The lender then withdrew the PLA notice in relation to Huang’s property and ceased marketing it for sale.
Huang complained to FSCL about the distress he suffered when he discovered his property had been marketed for sale without his knowledge. He also complained that marketing costs and the lender’s legal fees in relation to the sale of his property had been added to the loan balance. Further, Huang had incurred legal fees to stop the sale of his property.
In Huang’s view, the lender had not correctly followed the PLA’s service requirements. Huang had incurred legal fees and suffered distress, and also the lender’s legal fees and marketing costs had been added to the loan balance. Although the lender agreed not to take any further steps to sell Huang’s property while FSCL investigated the complaint, they considered they’d correctly followed the PLA process and did not need to compensate Huang.
Huang said that he’d be willing to withdraw his complaint if the lender agreed to pay his legal costs ($5,000), $2,000 for distress, and if the lender agreed not to add their own legal fees and marketing costs to the loan balance.
We explained to Huang that ultimately, the debt would have to be repaid. The sale proceeds of Mei’s home had not paid off the debt, and with Mei and Huang not able to come up with the balance (about $480,000), there was no impediment to the lender serving a new PLA notice on Huang and re-commencing the sale process. Huang agreed he would give his written permission for a new PLA notice to be served on his lawyer, if the lender agreed to his proposal to resolve the complaint.
We had some sympathy for Huang. He had guaranteed his daughters’ business loan and the consumer protection provisions of the Credit Contracts and Consumer Finance Act 2003 (CCCFA), relating to lenders’ responsible lending obligations, did not apply to him because the loan was not a consumer credit contract. Both he and his wife were in their 80s and now faced with the sale of their family home.
We reviewed Huang’s complaint, and it appeared arguable that the PLA notice had not been served correctly and that he did not know about it. We told the lender that if our Financial Ombudsman had to issue a decision on the complaint, she might find that the reasonable way to resolve the complaint was similar to Huang’s settlement proposal.
The lender agreed to Huang’s proposal, and the parties signed a settlement agreement, resolving the complaint.
Insights for consumers
This was a sad case highlighting the risks of parents guaranteeing their children’s loans, particularly riskier business loans. Although Huang and his wife had received independent legal advice at the time the loan was granted, the case serves as a reminder for parents to very carefully consider the risks of personally guaranteeing their children’s loans, which may include the risk of losing their home .