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The expanded Unfair Contract Terms (UCT) Regime paved a pathway to contest allegedly ‘unfair’ contract terms in Court. Still, a recent decision in favour of a private lender indicates that those aware of their obligations, with the right documentation in place, can successfully defend ‘unfair’ claims from disgruntled parties.

The decision of DCZ Early Learning Pty Ltd v Semper Mortgage Management Pty Ltd [2024] QSC 120 (DCZ v Semper) has set a pivotal precedent under the recently amended Unfair Contract Terms (UCT) Regime and its application to non-bank lending, with the case testing the fairness of fees and charging clauses in a private lender’s letter of offer against the new UCT regime expanded in November 2023.

Negotiations in Letter of Offer with private lender

In November 2023, DCZ Early Learning (DCZ) were urgently trying to settle a purchase contract prior to Christmas but with minimal time to settlement, DCZ opted to utilise a private lender, rather than a bank. They negotiated an Indicative Letter of Offer (LOO) from Semper Mortgage Management (Semper).

Semper obtained property valuations, and lodged caveats and PPSR registrations for their fees in accordance with the terms of the LOO, in case the loan did not proceed.

Private lender loan does not proceed

DCZ later indicated the purchase was unlikely to settle and requested a refund of the search and valuation fees. DCZ also claimed the letter was not binding and demanded the caveats and PPSR registrations be removed.

In response, Semper issued a demand for $366,260 for the various fees payable under the LOO.

DCZ and its guarantors applied to the Court for a declaration that clauses 8 and 9 of the LOO were void and of no effect. Their claim was that those clauses were unfair within the meaning of section 12BF of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act).

Consumer protection provision

Section 12BF of the ASIC Act provides that a term of a consumer/small business contract is unfair if:

• the term is unfair;
• the contract is a standard form contract; and
• the contract was a consumer /small business contract for a financial product or for the provision of financial services.

The third bullet point was not disputed and the two issues for determination were whether clauses 8 and 9 were terms within a standard form contract and whether those terms were unfair.

First issue: Was the letter a standard form contract?

The ASIC Act does not define ‘standard form contract’ rather it sets out a framework for Courts to make a determination on the facts. The relevant considerations include (but are not limited to):

• whether one party has all the bargaining power;
• the extent of any negotiation;
• whether the terms were on a “take it or leave it basis”; and
• whether the contract is tailored to the parties/transaction.

The Court held that Semper did not hold most of the bargaining power, due to four key factors.

1. There was extensive evidence of negotiations resulting in five versions of the LOO.
2. Although clauses 8 and 9 were not negotiated, these terms could have been amended if required (as suggested by other negotiations).
3. Semper did not take a “take it or leave it” stance during negotiations.
4. The letter was specifically tailored to DCZ and the transaction.

In finding that the LOO was not a ‘standard form contract’, the consumer protections under section 12BF of the ASIC Act were consequently not applicable.

Second issue: Were clauses 8 and 9 ‘unfair’?

Despite it being unnecessary, his Honour Justice Freeburn found it appropriate to consider whether clauses 8 and 9 were unfair under section 12BG of the ASIC Act.

Clause 8 obliged DCZ to pay Semper all fees, costs and disbursements outlined in the LOO even if the loan was not made. Clause 9 required that DCZ irrevocably and unconditionally charge, in favour of Semper, all their interest in any real and personal property to secure those fees.

Under section 12BG of the ASIC Act, a term is unfair if:

• it would cause significant imbalance in the parties’ rights and obligations;
• it is not reasonably necessary to protect the advantaged party’s legitimate interests; and
• it would cause detriment to a party if relied upon.

The Court must also take into account whether the term is transparent and the contract as a whole.

His Honour found that both clauses were not unfair as they did not cause significant imbalance, were reasonably necessary in protecting Semper’s interests and were written in a transparent manner.

In this finding, it was noted that Semper was required to source investors who were willing to invest money in the transaction. This required time and effort on Semper’s behalf and involved negotiating with investors, expediting valuations of the two mortgaged properties, liaising with banks and carrying out due diligence and administrative tasks (including correspondence with the broker).

Consequently, Semper had a legitimate interest in ensuring that it was not out of pocket for that time, effort and expense.

Separately, it was found that the imposition of a caveat or other charge on DCZ’s property could not be characterised as other than a detriment. However, when considering the contract as a whole, even if clauses 8 and 9 were overly protective of Semper’s fees, that was one potentially minor part of the overall transaction which involved providing swift financing for a business in circumstances where a bank could not assist.

DCZ’s application was dismissed, and Semper’s counterclaim for fees was allowed.

The takeaway for private lenders

Despite the expanded criteria for determining whether a contract is standard form, DCZ v Semper establishes an important precedent for the ability to defend against an unfair contract terms claim and demonstrates that lenders who are aware of their obligations and adopt the right processes and documentation can ensure their contracts do not fall foul of the legislation.

An adverse decision may have had broader implications to this lender as it may have resulted in the voiding of similar transactions for this lender and significant fines and penalties, not to mention the impact to reputation which cannot be measured.

Next steps

Navigating the UCT regime is a difficult task, let alone ensuring your financial services contracts do not include unfair terms. If you think that you need to revisit and renew your contracts, contact our Commercial team.

Want more info? Review our article for more information on how the changes to laws surrounding unfair contract terms can impact non-bank lending.

The information contained in this article is general in nature and cannot be relied on as legal advice nor does it create an engagement. Please contact one of our lawyers listed above for advice about your specific situation.