UNFAIR CONTRACT LAWS TO IMPACT DEVELOPMENT AND PROPERTY FINANCING
April 2024
Changes to Unfair Contract laws, which commenced in November 2023, are likely to impact the availability and terms of development and commercial property finance for small and not so small developers and commercial property buyers.
When does the amended law apply
The broadened scope of contracts (including finance documents) to which the laws apply is likely to result in one of two consequences for developers and commercial property buyers which have:
- less than 100 employees; or
- a turnover of less than $10m in the last financial year, and
who wish to borrow funds involving amounts of $5,000,000 or less.
The consequences of the above changes on financing will depend on how financiers wish to deal with the impact of the amended laws.
The penalties and other consequences for financiers who breach the amended laws are more onerous and substantial than was previously the case.
Can financiers avoid the new rules?
Financiers wishing to avoid the application of the amended laws may decide either to:
- limit the type of borrowers they wish to fund to those which have more than 100 employees and a greater than $10m turnover in their last financial year,
- not be involved in loans where the loan amount is less than $5m, or
- not use standard contracts to document loans and allow borrowers to negotiate terms which have a potentially significant impact on the borrower (not just terms which deal with minor or insubstantial matters).
What do the amended laws mean for borrowers?
Outcomes 1 and 2 would make it harder for smaller developers and commercial property investors to find finance. However, in the competitive finance market, where deals are not as plentiful as in the past, financiers are likely to be under pressure to fund deals and so may not wish to reduce their potential universe of clients.
Consequently, the legal changes should open the door for smaller borrowers to be in a better position to negotiate the terms of their financing arrangements.
A mandate for review and negotiation and a win for borrowers
The Ethos of my business has always been that borrowers need to have all finance documents provided to them by a lender (including the initial indicative letter of offer or term sheet) reviewed by a finance law specialist with a view to understanding what terms mean and negotiating those terms prior to signing anything.
I am pleased that the Federal Government has bolstered the existing unfair contract laws so as to essentially mandate that review and negotiation be part of the process followed by both the borrower and financier when putting in place financing arrangements. Financiers are now more likely to want to avoid being caught by the amended laws.
In my view this is a big win for borrowers and I look forward to assisting them in reviewing and negotiating the terms of their future finance arrangements.
If you would like to learn more about the above, please feel free to make contact or connect with me.
Peter
Director/Lawyer
Peter Faludi Consulting
Author of “The Ultimate Short Guide to Property and Development finance in Australia. There is much more to it than numbers”
