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Bank Loan Offers - Consider Carefully When Committing To Purchase

08 August 2014

The banks would no doubt have been concerned if a farming company had been successful in its recent journey through our Court system. The company was a victim of the 2008 GFC and consequent collapse in farm prices. It had claimed against ANZ for losses suffered when ANZ declined to finance a farm purchase because the terms of the ANZ loan offer had not been met.

 

Forivermor’s fortunes

Forivermor Limited owned a successful dairy farm. In September 2008 Forivermor signed an agreement to purchase a neighbouring dairy farm for nearly $7.3m. ANZ approved finance. One of the loan conditions was that Forivermor would sell 57 ha of another farm for $4.3m.

Shortly afterwards the market for dairy farms began to fall sharply. Forivermor was unable to sell any part of its farm and ultimately sold its whole farm for a greatly reduced value. ANZ declined to finance the $7.3 m purchase. The vendors cancelled their agreement with Forivermor and, in March 2010, sold their farm for $4.5m - $2.8m less than the $7.3m Forivermor had agreed to pay.

 

Forivermor’s claims

Forivermor sued ANZ on a number of legal grounds. The main base for Forivermor’s claims was that ANZ had led Forivermor and its lawyer to believe that ANZ would finance the purchase even if the 57 ha farm did not sell. Forivermor's claims against ANZ included the amount of its liability to the vendors for their $2.8m loss on the re-sale, expenditure in preparation for the purchase, the deposit paid for the purchase and $4.5m for the loss of the equity of the farm property it used to own.

Forivermor failed in the High Court and the Court of Appeal. The Supreme Court has refused Forivermor leave to appeal the Court of Appeal decision.

 

The written document is the start point and the end point

The Court of Appeal found that “the start and end point is the offer of finance made in the letter of 5 September 2008” and that ANZ had given no assurance that it would finance the purchase if the 57 ha farm did not sell. The Court also found that ANZ had not breached any of the duties it owed to Forivermor, it had acted fairly and reasonably, it had not breached the Code of Banking Practice and that a bank does not ordinarily owe its customers a duty to give business advice.  Although the loan offer had been made at a time when ANZ and Forivermor were confident that the 57 ha farm would sell, the borrowing had become unsustainable and the security for the Bank was no longer adequate. The Court said that Forivermor had taken a calculated risk in declaring the agreement unconditional and that ANZ was justified in declining to finance the purchase.

 

Understand your loan offer

If you are considering purchasing a property make sure that you fully understand the conditions placed on the loan to be made to you. Also consider the implications if you are unable to meet the loan conditions. As Forivermor found, any assurances and understandings that are not recorded in writing in the loan offer may carry little legal weight in a court of law.

 

Please email me at barbara.mcdermott@nwm.co.nz with your ideas for future articles.  Keep an eye out for next month’s column, where I will discuss another relevant rural legal issue.


 

Barbara McDermott is a partner of Norris Ward McKinnon, specialising in commercial and rural law.  With offices in Hamilton and Huntly, we have friendly, expert legal advisors ready to help you with your business and personal legal matters.   Find out more about us at www.nwm.co.nz