Letter of Offer Dispute – charging an Application Fee when the borrower withdraws.
The Queensland Court of Appeal decision of Memery v Trilogy Funds Management Limited  QCA 160 provides a useful analysis of when a lender may charge an application fee under a letter of offer agreement even if the loan does not proceed.
The borrower (Memery) appealed against a judgement in favour of the lender (Trilogy). The decision allowed the lender to recover an application fee even though the advance did not proceed. The borrower’s appeal relied on the interpretation of the lender’s ‘Facility Letter’ or letter of offer. The borrower signed the letter of offer. This implied that borrower accepted the terms of the agreement set out in the letter of offer.
The letter of offer contained the statement:
“your request for a loan facility has been approved on a ‘best endeavours’ basis subject to all conditions being satisfied”
Attached to the documentation was a schedule of fees specifying an application fee of $38,000 payable to the lender. All the fees in the attached schedule were payable immediately upon demand if the advance proceeded or if it did not proceed as a result of the borrower’s default or withdrawal.
After a month, the borrower decided not to go ahead with the mortgage loan. Instead it obtained a loan from a different lender. The borrower advised the lender that he would not proceed with the loan as he had obtained finance elsewhere. The issue before the trial judge was whether the lender was entitled to the application fee of $38,000.
The Court’s decision
The trial judge found:
- That the parties had made an enforceable agreement by entering into the letter of offer agreement.
- The parties’ dealings with one another and the letter of offer agreement meant that the borrower was required to pay the lender the application fee for the introductory and investigative services described in the letter of offer.
- Good consideration supported the letter of offer agreement, being the lenders promise to investigate and consider the loan application on a ‘best endeavours’ basis.
Court of Appeal decision
Issue 1: Was the application fee payable to the lender before advancing the loan?
A fundamental principle of contractual construction ‘is to ascertain and give effect to the intentions of the contracting parties’. To determine the intentions of the parties, a judge can:
- Look at the surrounding circumstances known to the parties;
- Identify the purpose of the transaction;
- Ascribe a reasonable meaning to the terms of the contract. The more unreasonable the possible outcome, the more likely it is that the parties could not have intended it.
The Court of Appeal found the borrower’s claim that the application fee was only payable upon receiving the loan advance as irreconcilable with the terms of the letter of offer. The letter of offer stated clearly that if the loan didn’t proceed as a result of the borrower withdrawing, the application fee would still be payable upon demand. The court concluded that ‘reading the letter as a whole fairly and broadly, the borrower was liable to pay the application fee’.
Issue 2: Was the promise to pay the application fee supported by consideration?
The borrower argued that there was no contract in place. Rather the letter of offer agreement left performance of the promise to advance the loan solely within the discretion of the lender. Accordingly, the court had to interpret the meaning of “best endeavours”. Did this actually impose any obligations on the lender? The borrower relied upon Justice Kitto’s judgement in Placer Development Ltd v The Commonwealth of Australia where he held:
“wherever words which by themselves constitute a promise are accompanied by words showing that the promisor is to have a discretion or option as to whether he will carry out that which purports to be the promise, the result is that there is no contract on which action can be brought at all”
On this basis, the borrower argued that the effect of the clauses in the letter of offer which allowed the lender to withdraw from the proposed loan facility if it believed that funding would not be in the lender’s best interest gave the lender a “discretion or option as to whether he will carry out that which purports to be the promise”. If this were the case, there could be no enforceable contract given the High Court decision of Justice Kitto.
In conclusion, the Court of Appeal disagreed with the borrower. Instead it adopted a businesslike interpretation of the letter of offer agreement, stating:
“the lender agreed to use its ‘best endeavours’ to advance $1,900,000 to the borrower, subject to satisfaction of the stated conditions”
It was held that the letter of offer agreement did not give the lender the unqualified discretion to withdraw from the letter of offer agreement. Rather the agreement imposed obligations on the lender. Because in the event of a dispute a court could order the lender to discharge its obligation to use its best endeavours to advance the loan.
Therefore, the Court dismissed the borrower’s appeal and ordered him to pay the lenders’ costs.
The judgement may be read in full by following the link below:
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