A non arms length sale is a hazard that most incoming mortgagees
want to avoid. This month Levy J, in the District Court of NSW,
found that a lender was entitled to recover a shortfall from a
number of third parties who had varying degrees of responsibility
for submitting a misleading front page of a sales contract as part
of a loan application.
Gadens acted for the lender. In the case:
two parties exchanged contracts for the sale of an investment
unit at an above market price
the front page of the sales contract recorded that a deposit
had been paid and that an estate agent was acting for the
the front page of the sale contract had been signed by the
vendors and faxed by the their solicitor to the lender prior to
settlement of the loan
the vendor and purchaser were both represented by the same
the vendors were prepared to settle, even though the purchasers
did not have available at settlement the balance (after financing)
of the purchase price
shortly after funding, the purchasers disappeared
no repayments were ever made
the disbursement of the settlement money included amounts to
pay the purchasers' legal fees, a broker and stamp duty.
The lender commenced proceedings claiming misleading and
deceptive conduct in the course of trade and commerce against the
The lender also claimed against the person who had witness the
purchasers' signatures on the loan contract and mortgage. The
lender claimed that the witness:
had misrepresented that he was personally acquainted with the
purchasers or had checked their identity; and/or
that the witness had aided and abetted the vendors in making
their misrepresentations to the lender (in breach of s 75B of the
Trade Practices Act and s 61 of the Fair Trading
Case against the vendors
Levy J found in favour of the lender against the vendors for the
full amount claimed, that being the amount of the lender's
shortfall plus interest.
Levy J was satisfied that:
there had not been a deposit paid (Levy J was not prepared to
accept the vendors' argument that the tendering of a cheque
together with a request not to cash the cheque, was sufficient to
constitute a deposit)
an estate agent had not introduced the purchasers to the
that the faxing of a sale contract front page with false
information concerning the existence of a deposit and estate agent,
was in this instance a representation made by the vendors in trade
that the lender had established reliance on the information
contained in the sale contract front pages ‑ since the
information was necessary to satisfy one of the lender's
pre-conditions to funding.
Case against the witness
As the case unfolded, it became apparent that the witness had
played a role beyond merely witnessing the purchasers'
signatures on the loan contract and mortgage.
In fact, the witness:
was an employee of the broker (who had been paid a $9,680
commission from the sale proceeds)
had introduced the purchasers to the lender
was the grandson of the vendors.
Levy J concluded:
"I find that the circumstances of the Fist
Defendant's involvement in the various steps in the transaction
suggest that it is more probable than not, by reason of the
suspicious characteristics of the transaction already identified,
the First Defendant had knowledge of the "scam" that was
perpetrated against the Plaintiff even though given his young age
and limited business acumen at that time he was a relatively minor
player in the events in question."
The case serves as an example of where the Courts have extended
the reach of the law beyond those who actually make the
misrepresentations to others who have knowledge of the
In the above case there was no direct evidence that the witness
had knowledge of the "scam". However, Levy J was prepared
to infer such knowledge from the circumstantial evidence. The
lender's case was assisted somewhat by the witness swearing two
contradictory affidavits (the witness had changed solicitors a
number of times during the course of the proceedings) about how he
had come to witness the purchasers' signature.
This case means that lenders should be on the lookout for
alternative means to recover a shortfall when the circumstances
warrant further investigation into the underlying transaction.
Third parties who may have some exposure include:
vendors and their solicitor
purchasers and their solicitor
brokers, loan intermediaries and originators
outgoing mortgagee and their solicitors.
t +61 2 9931 4763
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