1.Communication

While this may seem simple and something inherently obvious, it is not unusual for clear communication between lenders and borrowers to be overlooked or, sometimes intentionally, made complicated.

The most effective way to ensure a transaction runs smoothly is to make sure that all parties know what is being offered and what is being agreed to.  That way, when documents are provided or settlement is effected, everyone is on the same page and funds can be transferred without issue.

2.Know your customer

In a world where fraud is rampant, it is recommended that lenders undertake comprehensive due diligence on borrowers, guarantors, and grantors.

ASIC, NSW Land Registry Services, AFSA, and subscription databases provide for a significant amount of accurate information that allows lenders to obtain detailed cross-referenced information and ensure that the information provided is not only accurate but also truthful.  In time, every lender finds that the ‘truth’ is not always as truthful as borrowers or guarantors would like lenders to believe.

3.Equity

Where loans are secured solely by real property, it is critical that a lender obtain a precise and up-to-date valuation of the secured property.  

Not only will a professional valuation provide a comprehensive summary of the property and market value, and therefore the amount of equity available in the property, in the event a lender suffers a loss as a result of its reliance on the report, the lender may be entitled to bring a claim against that valuer for negligence.

4.Fairness

While no lender wants any loan to go into default or be subject to litigation, these situations do invariably arise from time-to-time, and when they do, those matters are usually decided on the application of principles of what is considered ‘conscionable’.

So as to be best positioned in those circumstances, a lender should look to ensuring that:

• there is full disclosure of all fees, costs, charges, and expenses, and that those items are reasonable having regard to the transaction and market;

• any ‘default’ interest rate is commensurate with genuine factors (i.e. the lender’s costs; the lender’s loss arising from being kept out of its funds; transaction risk; and commercial market rates); and

• the borrower/ guarantor enter into the transaction with their “eyes wide open” and have the opportunity to genuinely negotiate the terms of the loan.

5.Protection of priority

When taking security, which is either subordinate or superior to another security, it is paramount to ensure that there is a suitably drafted of priority between the secured parties.  Not only does this deed clearly set out each party’s rights and obligations, it also ensures that there is a record between the secured parties in the event a dispute arises as to which party is empowered to take charge in enforcing a security and to what amount the superior secured party is entitled to receive in priority. 

Although the above is ideal, in the commercial and logistical heavy world of banking, it is not always possible or necessary to enter into a priority deed. Sometimes, and rather frustratingly, a first mortgagee bank will refuse to enter into a priority deed. 

If you require any assistance on preparing loan documents or have any questions on best practices for lenders, Longton Legal’s banking and finance team are able to assist.

*Disclaimer: This is intended as general information only and not to be construed as legal advice. The above information is subject to changes over time. You should always seek professional advice beforetaking any course of action.*