The recent High Court decision in the dispute between non-bank lender Pearlfisher Capital and property developer Mega Capital (MC), while favourable to Pearlfisher, provides some useful reminders to lenders.
Key among these was that:
- The loan offer must be clear on when fees are payable and that they are payable irrespective of whether drawdown occurs.
- The quantum of fees should align with market practice and the fee structure should be justified. Pearlfisher charged a work fee, an arrangement fee and an establishment fee, providing a clear rationale for each one.
- The borrower must have an opportunity to take advice on the offer. This is particularly important with less sophisticated or experienced borrowers (characteristics that the Court did not think applied to MC).
MC entered into an agreement in November 2021 to buy land at Karaka for $19.8m but failed to settle on the due date, at which stage it began accruing penalty interest of around $10,000 per day. In order to complete the purchase, MC then obtained private funding of $2m and entered into a loan offer for $10.27 million plus fees and interest with Pearlfisher.
During the loan negotiations, Pearlfisher had confirmed that all fees would remain payable if the loan was not drawn down. Signed transaction documents were returned on 22 July 2022 and all fees were set out under the loan agreement.
Under the security arrangements, MC was to grant a first and only mortgage and general security agreement in favour of Pearlfisher.
On 26 July, Pearlfisher advanced an initial $8m into the trust account of MC’s solicitor, MC having confirmed that the sale would go through the following day. But on 27 July, MC advised Pearlfisher that settlement would be delayed until 29 July due to a shortfall in funding. Then on 28 July, it informed Pearlfisher that it had obtained alternative financing and would now not be proceeding with the Pearlfisher loan.
Pearlfisher then demanded a payment of $627,699.26 by 4pm on 11 August 2022, comprising an establishment fee of $530,000 and arrangement fees of around $100,000. MC failed to pay and was served a statutory demand on 19 August, which it applied to the High Court to have set aside.
The fees charged by Pearlfisher equated to around 6.13% of the loan amount against a ratio of around 2.2% for the alternative financing.
MC sought to have the loan agreement reopened under sections 117 to 134 of the Credit Contracts and Consumer Finance Act 2003 (“the CCCFA”), arguing that it was oppressive because it had been negotiated on an expedited timeline and that the fees were grossly excessive.
The High Court declined to set aside the agreement. It found that:
- MC was a sophisticated commercial party and had held itself out to be an experienced property developer through its conduct. The planned development was for 190 units with an estimated total value of around $95m, council approval for the earthworks had been secured and resource consent applications were underway;
- MC had received advice from their financial advisor, mortgage broker and legal representatives throughout the negotiations;
- Pearlfisher had provided reasonable explanation for its fee structure. Fees were specifically discussed and negotiated so MC was clear it was obligated to pay all fees in the event the loan was not drawn down; and
- As set out in Greenbank New Zealand Ltd vs Haas, the CCCFA must be considered in tandem with the need to allow “businesspeople, especially when, as here, they are in receipt of competent legal advice, to be free to decide what contracts they should enter into and upon what terms."
Our thanks to Annie Fan for preparing this article.