Barry was keen to purchase a business but had existing debt. He met with Janine, a mortgage broker, on 21 September to try to find a suitable lender to finance the business purchase. Barry signed Janine’s scope of service which contained a condition that Barry undertook to pay “all costs associated with and agreed, for work completed by the adviser, as stated in the scope of service.” The loan was to refinance Barry’s existing mortgage of $876,000 and borrow a further $125,000 for the business purchase.
Barry and Janine’s meeting only lasted 30 minutes, but there were subsequently many e-mails and phone calls to arrange finance. Janine stated at their first meeting that the fees were likely to be ‘a couple of thousand’, and that her fee was usually paid by the lender upon securing finance.
Because of Barry’s existing liabilities, banks were not keen on lending and so, on 20 October, Janine approached a third-party finance broker (Harry) to assist in securing finance. Harry’s mandate stated that payment of his brokerage fee was contingent upon an offer being tabled, rather than finance being accepted (by Barry). Barry was unaware Janine had approached a third party who operated on different terms to the terms that Janine had indicated at their first face to face meeting.
Harry told Janine that the brokerage fee was 1.35% of the amount being financed. Janine asked that Harry also collect a fee on her behalf.
Over the next ten days Janine communicated with Harry about seeking a finance offer, and with Barry about seeking further information and providing him with updates.
On 31 October at 9:30am, Harry sent Janine the mandate agreement for Barry to sign. The agreement stated a brokerage fee of 1.5% (including Janine’s fee), was payable upon the broker presenting an offer of finance for at least 90% of the amount of finance sought. At 12:30pm Janine emailed Barry the mandate. In the email, Janine stated;
“He (Harry) has asked that the above mandate be signed and emailed back…The mandate spells out the amount sought and the fees so that he can look to get a formal offer in place.”
Barry sent the signed mandate back to Janine. Later that day Harry emailed through the loan offer documents.
On 7 November Barry signed the loan offer and returned it, requesting settlement for 18 November. On 16 November, given some problems associated with purchasing the business, Barry asked what the fee would be if he was unable to proceed with the purchase. Janine, having contacted Harry, responded that the fee would be $15,825. Barry thought the fee was only payable if he went through with the purchase.
Barry’s view
Barry said he was unaware of Harry’s involvement until the mandate was signed, and he did not believe Janine’s work in securing the loan offer amounted to $15,825 worth of work. Barry considered it unfair he had to pay for Harry’s involvement when he was not aware Harry was acting for him. Barry believed that Janine, as the professional, should have explained the entirety of the mandate agreement to him, given it differed from the fee indication she gave at their initial meeting. In essence Barry said it was a case of “here, sign this, don’t worry.” Barry maintained that if Harry’s fee and involvement had been explained to him, and he was aware a substantial fee had to be paid whether or not the deal went ahead, he would have made a different decision.
Barry thought the fee was unfair and he complained to FSCL.
Janine’s view
Janine said she spent many hours attempting to secure finance for Barry and, while it was costlier to receive finance from a non-bank lender, it was the only option for Barry, due to his financial position. Janine also asserted that Barry’s extensive business history, and the fact he had taken out a mortgage with another non-bank lender along similar terms (but for a 1% brokerage fee) earlier in the year, indicated he should have been aware of how brokerage fees were charged. Given the mandate was a one-page document, Janine thought Barry had accepted and understood the terms when he returned the signed document.
Harry’s view
Harry explained he had spent 5 weeks working on securing finance for Barry. In his eyes this constituted a significant amount of time and effort. Harry pointed to Barry’s credit and business history to support an argument that Barry should have been aware of the fees and costs charged in this type of transaction. In addition, Harry said that as Barry had dealt with 20 lenders in the past 3 years and, having signed the mandate, Barry could be expected to understand that he had to pay Harry’s brokerage fee.
Review
We found that the mandate was a legally binding contract which required Barry to pay Harry’s fee. The mandate outlined both Harry’s fee and the fact the fee was payable upon an offer being presented.
However, given Janine was Barry’s mortgage adviser she should have done more to make him aware of his obligations and the consequences of signing the mandate. Although Janine and Harry pointed to Barry’s business experience as evidence he understood the consequences of entering into such an agreement, Janine and Harry should not have assumed Barry had this knowledge.
Moreover, Janine gave no indication that the brokerage fee would be as high as it turned out to be. It was clear, that at the time of her initial meeting with Barry, Janine was unaware of the quantum of brokerage fees because she was yet to engage with Harry. She only confirmed this fee level after Harry’s mandate and offer were provided to Barry. Janine should then have pointed out that the fee would be more than she had initially estimated.
Outcome
On the face of things, Barry was liable to pay the entire fee. However, we found that Janine contributed to Barry’s mistaken assumption that the fees would only be a few thousand dollars, by failing to outline at the start of their relationship how brokers’ fees work, and by not passing on the information she received from Harry about how his firm’s fees were calculated when she received them, sometime before Barry signed the mandate. Janine should also have made it explicitly clear to Barry that the brokerage fees were payable once an offer was tabled.
As a result of Janine’s material contribution to Barry’s misunderstanding about the brokerage fee, we said that, in all fairness, the fee should be reduced by 20%.
Barry said he could not pay Harry’s fee, even when reduced by 20%. Harry said he would take debt recovery action against Barry.
Key insight for consumers
When you engage a professional broker, be aware you are responsible for any obligations created by the signing of a mandate, including fees. Regardless of what your adviser or broker states, it is very important to read the contract or seek independent advice.
You will often have to pay a fee to the broker, even when you do not draw down the loan finance arranged by the broker.
