Private lenders in Victoria are often asked to fund quickly: bridging finance before a sale settles, or a second mortgage to complete a purchase or support a business. The legal position is largely fixed before the money goes out, but problems usually surface only when the loan goes wrong.
This article outlines, in general terms, the issues a lender may review before funding a bridging or second mortgage loan, and how enforcement works in Victoria. Our separate article on private lending legal documents in Australia explains the loan and security documents themselves.
Could consumer credit law apply?
The National Credit Code may apply where an individual (or strata corporation) borrows wholly or predominantly for personal, domestic or household purposes, or for residential investment property, from a lender providing credit as a business. The lender may then need a credit licence and must meet disclosure, responsible lending, hardship and enforcement requirements.
A properly obtained business purpose declaration can raise a presumption that the Code does not apply, but not if the lender knew, had reason to believe, or would have discovered on reasonable inquiry that the credit was really for a regulated purpose. ASIC has brought proceedings where declarations were relied on, and the Federal Court has found contraventions. What matters is what the money is actually for, and what the lender and broker knew.
Lending to companies and trusts
Trustees
A trust is not a legal person; the lender deals with the trustee. The trust deed, with any variations, needs checking for the trustee’s power to borrow, to grant security over trust property and, where relevant, to guarantee another party’s debts. If a trustee acts outside power or in breach of trust, the lender’s ability to reach trust assets through the trustee’s right of indemnity may be affected.
Companies
Under section 127 of the Corporations Act 2001 (Cth), a company may execute a document through two directors, a director and the company secretary, or, for a proprietary company with a sole director, that director if they are also the sole company secretary or the company has no secretary. The Act also lets outsiders make certain assumptions, broadly reflecting the “indoor management” rule, such as that internal procedures were followed and that a document executed under section 127 was duly executed. The assumptions are not available to someone who knew or suspected they were incorrect.
Guarantees from family members
Guarantees from family members who receive no direct benefit, such as elderly parents, are the securities most often challenged. Courts may set aside a guarantee for unconscionable dealing where the guarantor was at a special disadvantage, such as age, limited English or lack of explanation, that the lender knew or ought to have known of. Commercial Bank of Australia v Amadio, in which elderly parents guaranteed their son’s company, is the leading High Court illustration. In Garcia v National Australia Bank, the High Court held it may be unconscionable to enforce a wife’s guarantee of her husband’s business debts where she gained no benefit, misunderstood its effect, and the lender neither explained it nor knew that someone else had. How far the principle reaches beyond marriage remains debated.
This is why lenders commonly require independent legal advice and a solicitor’s certificate for each guarantor. The advice helps only if it is genuine: given apart from the borrower, in a language the guarantor understands, by their own lawyer.
Second mortgages: consent, priority and the first mortgagee
A second mortgagee’s position depends heavily on the first. In Victoria, the first mortgagee usually controls the electronic certificate of title, so its cooperation is generally needed to register a second mortgage, and the first mortgage may treat further encumbrance as a default. A deed of priority may cap the amount the first mortgagee can rank ahead for and set out how the parties deal with each other.
The central risk is enforcement by the first mortgagee. If it sells, the proceeds go first to the first mortgage debt and costs, and the second mortgagee receives only what is left. The type of first facility, whether further advances could rank ahead, and notice of default all matter.
Bridging finance and exit risk
Bridging loans are usually repaid from a sale or refinance. The review may consider what happens if the sale is delayed, fails or achieves less than expected, or the refinance is refused, and how the documents deal with extensions.
Identity, authority and payment fraud
Victorian law requires a mortgagee to take reasonable steps to verify the mortgagor’s identity, and the electronic conveyancing rules impose verification and client authorisation requirements. Lenders may also need to confirm each signatory’s authority, including under a power of attorney, and verify overseas signatories properly.
Cybercriminals may intercept email and send convincing last-minute requests to change bank details. Electronic settlement reduces some risks, but payment directions still need independent verification.
Enforcement in Victoria
Under the Transfer of Land Act 1958 (Vic), a registered mortgagee’s power of sale generally depends on a default, a notice served on the mortgagor, and the default continuing for the period the Act or the mortgage requires. Defective notices are a common cause of delay. Where the National Credit Code applies, separate default notice and hardship requirements apply as well.
A selling mortgagee must act in good faith and take reasonable steps to obtain the best price reasonably obtainable, and must account for any surplus to later security holders and the mortgagor. If the property is occupied, the lender may need a court order for possession. Guarantees are enforced separately, by demand and if necessary by proceedings.
A hypothetical scenario
Consider a lender asked to fund a short-term second mortgage to a family company trustee, guaranteed by the directors’ elderly parents, until another property sells. Questions arose about the trustee’s power to give security, whether part of the loan was really for personal use, the first mortgagee’s cooperation, and whether the parents understood their exposure. The right approach depended on facts that needed advice.
Questions to discuss with your lawyer
- What is the money actually for, and could the National Credit Code apply?
- Who is the borrower, and does the trust deed or company structure permit the loan and security?
- Is any guarantor at a disadvantage, and have they received genuine independent advice?
- What does the first mortgage allow, and is a deed of priority needed?
- What is the exit, and what happens if it fails?
- If the borrower defaults, what notices and steps will enforcement involve?
How we work with mortgage brokers and lenders
Brokers often introduce lenders mid-deal. We act for the lender only, work through diligence, documents and PEXA registration on the broker’s timetable, and keep the broker informed as the client permits. Borrowers and guarantors need their own lawyers, and we say so early.
Frequently asked questions
Does a business purpose declaration stop the National Credit Code applying?
Not always. It may raise a presumption, but not where the lender knew, had reason to believe or would have found on reasonable inquiry that the purpose was regulated.
How does a private lender sell a mortgaged property in Victoria?
Generally by serving a default notice under the Transfer of Land Act 1958 and, if the default is not remedied in time, exercising the power of sale, subject to duties about price. Advice on the specific notice is important.
Every family’s situation is different, and the answer often turns on details. Book a consultation so we can review your documents and circumstances before you act.
How Chua Tan Associates can help
Chua Tan Associates acts for private lenders in Victoria on pre-funding diligence, deal review, loan and security documents, registration and, where needed, enforcement. Justin Chua trained in accounting (Bachelor of Commerce, accounting major), is an affiliate member of STEP (the Society of Trust and Estate Practitioners), and is a Nationally Accredited Mediator and an Accredited Family Business Advisor. We work with lawyers in Asia for offshore parties, have a notary public, and advise in English, Mandarin and Cantonese.
Important: This article is general information only and must not be relied on. It is not legal, tax or financial advice, does not take your circumstances into account, and may not reflect changes in the law after publication. Laws of other countries may also apply. Do not act or refrain from acting on the basis of this article. Reading it or contacting us does not create a lawyer–client relationship. Please book a consultation for advice on your situation.
Related reading
Chua Tan Associates acts for families, executors, trustees and their professional advisers in estate planning, estate administration and estate disputes in Australia and across borders. To arrange a confidential consultation, please contact our Melbourne office on +61 3 9602 3988 or submit an enquiry. Advice is available in English, Mandarin and Cantonese.
Justin Chua (蔡智勋), lawyer and mediator, Chua Tan Associates, Melbourne. General information only, not legal or tax advice.
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