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Before you sign…

On By Geoff GreenIn Expert Witness, FinanceLeave a comment

From my work as a banking expert witness, it seems that the success fees charged by finance brokers (or the caveats that sometimes secure them) result in litigation more than they should!

You’ll be in the best possible position to avoid disputes if you have the key points accurately documented in the engagement letter.  This is my checklist of things to review, before you sign an engagement letter (or “mandate” as they are sometimes called).

  1. Is there a clear and meaningful definition of success?  There are two parts to this.

    First, will “success” as it is defined deliver the funding that you need, when you need it?  

    Are there any pre-conditions that will limit your ability to access the funding?  If you don’t have capacity to contribute equity, then a loan with an LVR (Loan to Valuation) or LTC (Loan to Cost) ratio requirement won’t help you.  Similarly, a $1m invoice finance facility won’t provide you with $1 million of funding unless you have “eligible receivables” of $1.25 million.

    Secondly, Is the success fee triggered by a credit approved letter of offer (good) or a highly conditional indicative offer (bad)?  Are you agreeing to pay a success fee for a non-binding indicative offer that might represent 15 minutes work?

  2. Is the limit too high?  A limit that is above your actual funding requirement can provide a useful buffer up to a point – but will also result in a higher establishment fee, and higher success fee.  Don’t pay (twice!) for a buffer that you will never use.

  3. Will you know what information is provided to which lenders?  I do a fair bit of work “trying again” after a failed first attempt.  That work is made more difficult if the borrower can’t show me the information already given to lenders, or tell me which lenders have already been approached. 

  4. How long is the engagement for?  Usually, you will be appointing a broker exclusively.  Make sure that you will be able to move on if you feel you need to, and try someone else, if they don’t deliver.

    How long is the engagement for?  Usually, you will be appointing a broker exclusively.  Make sure that you will be able to move on if you feel you need to, and try someone else, if they don’t deliver.

  5. Is there a “charging clause” to secure payment of the success fee?  A charging clause means that a caveat can be registered over real estate.  Caveats impact your ability to deal with the property, and can be time consuming and expensive to remove.

    A caveat to secure payment of a success fee might seem counter-intuitive because the new finance should fund payment of the success fee – but some brokers use them to make sure they are paid if their client declines a finance offer that satisfies the success criteria (I don’t).

A well drafted engagement letter makes all those things clear, but it is also usually necessary to engage the broker’s professional indemnity insurance (if you haven’t signed an engagement letter you are probably not a client, and if you are not a client, you are probably not protected by their PI policy).

Some engagement letters are short and simple, but some are long and involved.  If there’s any doubt about what you are asked to sign, and especially, whether it contains a charging clause – have it reviewed by your lawyer. 

If it only appears after your broker has received a finance offer, which they are “not allowed” to show you until you sign: definitely have it reviewed by your lawyer!

Should you use a tender process to find your next bank?

On By Geoff GreenIn Finance, Loan workouts, Safe Harbour, TurnaroundsLeave a comment

To tender, or not?

A business borrower puts their banking “out to tender” by delivering an information pack to multiple banks at the same time.  If all runs to plan, they receive multiple finance offers, and select the offer that best suits their needs.

A tender process can deliver a great outcome – but there’s the risk that it doesn’t. 

What happens if you don’t get any offers? 

A failed tender doesn’t stop a borrower from trying again – but my experience is that it becomes harder to obtain finance after a failed tender process.  That’s why my advice is to consider each situation on its merits. 

Are you “hot”?

The starting point in assessing whether or not to run a tender process is to assemble the information that you will need to provide to lenders:

  1. A clear understanding of the debt size and structure that you want.
  2. Historical financials that either reflect a stable three-year period of profitability, or demonstrate a clear trajectory to strong and increasing profits.
  3. Year-to-date management accounts which confirm the direction shown in the annual accounts.
  4. “Three-way” projections – integrated projections which set out projected cashflow, profit and loss and balance sheet.
  5. Tax office lodgements up to date, with no unaddressed arrears.
  6. Capacity to offer security. Obviously, real estate security is well-regarded, but it is not essential.

The next stage is to assess whether multiple lenders are likely to be interested in the deal.

Lenders will have clear boundaries around the types of deals they can do, and won’t do, usually defined by reference to financial ratios such as the Loan to Valuation ratio and the Interest Cover ratio (their “risk appetite”).

Your debt adviser should be able to tell you about the financial ratios that are critical for your structure and industry, and tell you which lenders are likely to be interested in your deal.

If multiple lenders will be interested, then a tender is probably the way to go.  

What if you are not?

What’s wrong with putting your banking out to tender, to just “have a crack” and see what response you get?

Bankers have increasing demands on their time, and they are pretty pragmatic about how they use it.

A tender means that they do all of a normal credit assessment work – but risk missing out on the deal altogether.

They may let the opportunity pass if they have better options to pursue – and if it requires extra work because it is on the edge of their risk appetite, they almost certainly do!

Second time lucky?

Of course, you can go back to a banker that passed on a deal the first time round, and ask her or him to re-consider – but they will probably assume that no other lender liked the deal (or why would you be talking to them?) – and that is a tough position to start from.

It is often better to approach a single banker who will be more prepared to invest time if she or he knows that they will be the only one looking at the transaction.  If they pass on the deal, they will provide feedback and a perspective that allows you to tweak your approach to the next lender.

How do you recover from a failed tender?

Tenders fail for a variety of reasons:

  • A history of financial underperformance that needs a careful explanation.
  • Projections that look unrealistic, or slapdash.
  • Risks that haven’t been explained or effectively mitigated.

You need to critically examine the information provided to the lenders.  An experienced debt adviser should be able to identify any issues and help you to understand whether it is fixable.  From there you can assess whether to re-visit the same bankers with better information, or whether you need to approach new bankers with “fresh eyes” and no memory of the original presentation.

 

Broker’s duty extends beyond the terms of the engagement letter

On By Geoff GreenIn Finance, Loan workoutsLeave a comment

Hoho Property Pty Ltd v Bass Finance No 37 Pty Ltd is a very interesting case for those of us doing debt advisory work.

The case was a three-cornered contest: a lender sued a borrower, who cross-claimed against the broker who arranged the finance.

The Court found that the broker’s engagement letter defined its contractual obligation “narrowly.”  The broker’s contractual obligations:

  • Only began after the date on which the loan application had already been submitted, and accepted by the lender.
  • Were limited to assisting the the borrower to obtain the specified loan from the specified lender.
  • Did not require the broker to seek more suitable finance than offered by the lender, or advise whether the loan met the borrower’s requirements.

Notwithstanding those contractual limitations the Court found that the broker had breached its obligation to provide its services with reasonable care and skill.  The Court awarded nominal damages against the broker – it held that the lender had failed to prove its debt because a Dobbs certificate was invalid (it appeared to be issued by a company not identified in the loan documents) – and so did not consider causation and loss caused by the breach.

The judgement includes a very helpful summary:

“SUMMARY

  1. Ms Ly and Mr Ho hail from Vietnam, although they have lived in Australia for many years. While the couple speak English, their solicitor had learned from experience that it was necessary to have legal documents explained to them with a Vietnamese interpreter.
  2. The couple ran a butchery business but decided to venture into property development, buying a development site with approval to construct apartments. Using the services of a mortgage broker, the couple obtained a 12 month loan to complete the purchase of the land. The loan was to be repaid in January 2021.
  3. The Broker was retained to source finance to pay out the loan and to fund construction. The Lender offered to provide finance of $9.62 million, of which a sizeable portion would be used to pay interest and fees. The Broker charged some $200,000 for its services.
  4. Hoho Property was not obliged to repay the existing loan until 28 January 2021. Early repayment did not entitle the borrower to any rebate on interest accruing before that date. However, the Lender was “very keen to get this done pre Xmas”. A completion date of Tuesday, 22 December 2020 was chosen; the plaintiffs’ solicitor was advised of the date on Wednesday, 16 December 2020, when he had been provided with one of the proposed transaction documents, in draft, and subject to change.
  5. The defendants pressed the plaintiffs and their solicitor to execute the documents, at a time where a complete set of the documents was yet to be provided, and in final form. The plaintiffs’ solicitor resisted the suggested urgency, advising the defendants by email that it was impossible to review the documents in these circumstances by the requested deadline, in particular, where “It is also likely that the clients will require an Interpreter”.
  6. The defendants regarding the plaintiffs’ solicitor as engaging in delaying tactics. The defendants sent a series of offensive and threatening emails, suggesting that the plaintiffs faced the risk “of not settling the transaction at all if you delay”. The plaintiffs’ solicitor told the Broker that his clients needed an interpreter. The Broker asked the solicitor to have the clients sign the documents and provide advice later; the plaintiffs’ solicitor refused and warned the Lender that pressuring his clients to sign without independent legal advice was considered duress.
  7. Further unpleasant emails followed from the Lender, telling the plaintiffs’ solicitor not to waste his time sending such emails and to just do his job, failing which there was a risk that completion would not occur. Shortly after these communications, the plaintiffs’ solicitor was provided with a full suite of transaction documents in final form. However, the Lender was not prepared to continue if the plaintiffs continued to use their solicitor.
  8. The Broker told the plaintiffs that, if they wanted to keep their solicitor, the Lender would not advance the loan, “You have no choice.” This ultimatum caused significant distress to the borrowers, who understood that if they did not execute the documents on the date nominated by the Lender, then there would be no loan at all. The Broker arranged new solicitors and assisted the plaintiffs to terminate the retainer of their existing solicitor by drafting the necessary communications. The Broker provided initial instructions to the new solicitors.
  9. The plaintiffs did not help themselves. First, shortly before completion, the plaintiffs, with the assistance of the Broker, advised that their assets were significantly greater than initially disclosed in their application, including by reasons of properties in Vietnam worth $7.5 million. This appears to have been done in order to satisfy the Lender that the plaintiffs were able to fund the costs of construction in excess of the proposed loan amount. Second, and more importantly, Ms Ly gave the Broker inaccurate information as to her solicitor’s prior use of an interpreter for the couple and sent a text message – itself expressed in poor English and at the end of a long day in which she had been rung constantly by the Broker – that she did not need an interpreter.
  10. On the designated day for completion, the plaintiffs met their new solicitors and were provided with legal advice. There was no interpreter; the plaintiffs again said they did not need one. Following completion, the plaintiffs soon went into default.
  11. The Broker’s performance of its contract was in breach of its obligation to provide its services with reasonable care and skill. Where duress involves actual or threatened unlawful conduct, it was not suggested that the Lender’s threats were unlawful, where there was no legal obligation to provide the loan at all. While the Broker’s breach of contract could be considered unlawful for the purposes of duress, it was not the relevant conduct that generated the illegitimate pressure in question.
  12. The plaintiffs did suffer from a special disadvantage affecting their ability to make a judgment as to their own best interests, from a combination of circumstances: lack of experience, lack of English proficiency, an artificial deadline and suggested adverse implications should they fail to accede to the Lender’s demands. Given the Lender’s relative non-involvement with the plaintiffs, it did not have actual or constructive knowledge of the special disadvantage. The Broker had actual knowledge of these circumstances save for the plaintiffs’ lack of English proficiency, where the Broker had constructive knowledge given his more extensive dealings with the couple.
  13. The Broker made unconscientious use of its superior position and engaged in unconscionable conduct but no remedy ought be granted. The plaintiffs sought that the finance documents be declared void, where the unconscionable conduct in question was that of a third party to the contracts, in the absence of procurement by the Lender, or the Lender having actual or constructive notice of the unconscionable conduct. The plaintiffs also sought a declaration that the Broker was not entitled to its fee, where the Broker’s entitlement to the fee arose prior to and independently of the unconscionable conduct. Whilst the Courts have a very wide jurisdiction to grant declaratory relief, it is not so broad.
  14. Notwithstanding all of this, the Lender failed to prove that it was owed any moneys by the plaintiffs, as the Dobbs certificate did not conform with the contract. It was thus unnecessary to resolve the plaintiffs’ claim for compensation from the Broker, which was premised on liability to the Lender. Similarly for the claim against the Broker for damages for breach of contract, no substantive damage was proved and nominal damages are awarded.”