Sign in Haste – Repent at Leisure

In the last few months, the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Banking Royal Commission) released its report and made recommendations into the lending practices followed by the banking and financial services industry. This led many financial institutions to announce sweeping changes in their lending practices.

This month’s newsletter focuses on the legal and factual implications [a risk/benefit analysis of consequences] of elderly and vulnerable individuals directly or indirectly participating in contractual obligations with financial institutions and their associates. This article aims at alerting the elderly and vulnerable with some of the innovative ways that the financial industry may come up with in their lending practices despite the Banking Royal Commission’s recommendations.

A recent inquiry by an elderly couple to provide them with independent legal advice made me reflect as to whether the elderly and vulnerable are really in safe haven after the Banking Royal Commission.

A few weeks ago, an elderly couple visited my office and instructed me to provide them with independent legal advice as to a proposed transaction. The couple were both retired and received pension benefits. The couple had financially assisted one of their only biological children to purchase a home by borrowing monies and registering a reverse mortgage on their home. Subsequent to purchasing a home, that child declared bankruptcy for a brief period of time due to debts incurred by that child’s ex-partner. That child sought advice from a financial institution and a mortgage broker as to how he can reduce the rate of interest payable on his home loan and the interest payable on the reverse mortgage subsequent to both his parents passing away.

The financial institution granted an unconditional approval to re-finance his home loan and his parent’s reverse mortgage loan subject to his parents transferring their interest in their home to him. In return, both parents and that child would execute a deed of acknowledgement of debt. In this deed, that child would acknowledge that he has received the equity in the parents’ home as a loan and the parents would get a life interest to live in their home subsequent to transferring it to that child rather than receiving any purchase price.

The elderly couple were keen to know whether or not there were any significant risks in them transferring their home to that child.

The proposed transaction had the following three significant (factual and legal) risks:

1. Firstly, if both parents made a decision to transfer their home to that child without receiving any actual purchase price, they would not have any asset(s) nor any monies, which may assist the parents in meeting future medical expenses or expenses to live in a nursing home (if required). Further, at any future point in time if their child is not in a position to financially assist his parents to meet their future medical expenses or expenses to live in a nursing home the parents will be compelled to continue living in the property, which was transferred to that child, and be completely dependent on the pension benefits that they receive.

2. Secondly, if that child and his potential partner’s relationship is the subject of a Family Court proceeding, any asset(s) held by that child in his individual name will more likely than not be included in the joint asset pool and subject of Family Court orders. These orders may include dealing with all assets held by that child, including the property, which was transferred by the parents to that child. Any potential decision by the Family Court is likely to render the parents without a home and without any cash/monies.

3. Thirdly, if that child is unable to pay the mortgage monies to the financial institution for any reason beyond his control (for example, legal or medical incapacity to earn an income, any bankruptcy proceedings etc.), the property is likely to be subject of a foreclosure action by the financial institution. In the event that the financial institution makes a decision to foreclose the loan, it is entitled to sell the assets to satisfy its outstanding debt and pay the balance proceeds of sale to the registered proprietor, that child, thereby rendering the parents without a home and without any cash/monies. Should the parents make a decision to enforce their rights under any potential acknowledgement of debt, they are likely to incur significant legal costs without any guarantee of a favourable outcome.

In the given circumstances, the potential risks in transferring the property far outweighed any potential benefits to the parents and advised them that the proposed transaction is not recommended.

Note that this article sets out only one of several possible client circumstances.

Takeaway Message – Look before you sign your life away!

Elderly and vulnerable clients should be extremely cautious of the innovative ways that financial institutions and their associates may adopt to gain their patronage subsequent to the Banking Royal Commission report. We strongly recommend elderly and vulnerable individuals seek independent legal advice prior to signing off any legal or financial documentation. The intent of this advice is to ensure they are not rendered homeless or cashless. The potentially irreversible and extreme risks associated with their choices may significantly outweigh the seemingly natural benefits of doing so.

Please note that any information included in this article is general information only and does not constitute legal advice. Please contact us to discuss your particular circumstances.

Archana Luktuke2 May 2019

Mr and Mrs Joe Bloggs contacted me to seek legal advice on a proposed commercial lease provided by the real estate agent for their upcoming coffee shop in suburban Perth.

Mr and Mrs Bloggs were being rushed into signing the proposed lease, which they were not comfortable with. They started by explaining how their friend, who runs a hair dressing salon, was provided with extensive written information and a proposed lease to review before executing it. This was in stark contrast to a small seven-page template that they received by way of a proposed lease from their letting agency. I explained to Mr and Mrs Bloggs that their friend and they are subject to separate leasing legislation, however their due diligence before signing the proposed lease will assist them in the long run. In Western Australia, leases for commercial premises can be categorised as retail leases and commercial leases. It is important to note that all commercial leases in Western Australia are not governed by the same legislation.

A summary of the safeguards that a potential lessee of a commercial lease must consider is discussed below.

Retail Leases

Retail leases are governed by Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA) (the “Retail Shops Act”) and are limited to premises:

(a) with a lettable area of 1,000 m2 or less;

(b) used for carrying on a business and that are in a retail shopping centre (a group of premises, 5 or more) or otherwise; and

As at 1 January 2013, 'specified businesses' are limited to:

(a) dry cleaning;

(b) hairdressing;

(d) shoe repair (which includes key cutting and engraving); and

(e) sale or rental of videos tapes, DVDs, electronic games and other similar amusements.

Any landlord, whose commercial premises is governed by the Retail Shops Act, is bound by significant number of obligations as to the information he/she needs to disclose to a potential lessee prior to executing the lease. In comparison landlords, whose premises is governed by the Transfer of Land Act 1893 (WA) and the Property Law Act 1969 (WA), are not bound by any specific obligations as to the information he/she needs to disclose to a potential lessee prior to executing the lease.

The Retail Shops Act did not apply to Mr and Mrs Bloggs proposed lease. Therefore, began Mr and Mrs Bloggs’ due diligence journey before executing their commercial lease.

Commercial Leases

The real estate agent provided Mr and Mrs Bloggs with two documents – the Commercial Lease with Annexures and General Terms and Conditions of the Lease. Mr and Mrs Bloggs were seeking advice as to whether both these documents captured the terms and conditions of the agreement between the landlord and them.

Typically, most real estate agents would fill in the details in a Commercial Lease template published by Real Estate Institute of Western Australia (REIWA) and provide it along with the General Terms and Conditions of Lease, also published by REIWA, to any potential lessee.

The General Terms and Conditions of Lease document sets out the obligations and liabilities of the landlord and the potential lessee, however any potential lessee must review whether the following key details have been included in Commercial Lease document provided to him/her:

(a) whether the potential lessee and the landlord have been accurately identified (is the potential lessee and/or the landlord an individual or a company);

(b) whether any guarantors have been included in the lease;

(d) whether any other items (such as equipment) owned by the landlord are being included with the lease;

(e) the term of the lease;

(f) whether the potential lessee has an option or multiple options to renew the lease;

(g) the amount of rent and the frequency of payment of rent;

(h) the mechanism and frequency of rent review;

(i) what are the types of outgoings that the potential lessee is to pay and an estimated amount per month;

(j) whether a security deposit or bank guarantee will be held and for what amount;

(k) permitted use of the premises;

(l) whether the landlord has obtained approvals for the intended use and signage from the local council and the strata management (if applicable);

(m) whether the potential lessee has been provided with copies of approvals for intended use;

(n) insurance requirements to be complied with by the potential lessee; and

(o) how the agreement can be terminated and what is the notice period.

Mr and Mrs Bloggs proposed lease document had the following inadequacies:

(a) incorrect details of the proposed lessee – Mrs Bloggs was named as a lessee in place of the potential lessee company;

(b) the landlord had not obtained any approvals from the local council and the strata management for the intended use and signage although the terms stated otherwise;

If Mr and Mrs Bloggs would have signed up a lease with the inadequacies mentioned above, they would have put themselves in a financial predicament as the incorrect person would have been bound to comply with terms of the lease without any approvals to run the business at the premises and with no estimate of the costs towards outgoings.

Takeaway Message

Caveat emptor – buyers (in this case potential lessees) beware:

The clear message for any individual or entity considering a commercial (non-retail) lease is to undertake adequate due diligence and seek independent legal advice before executing any commercial (non-retail) lease.

Please note that any information included in this article is general information only and does not constitute legal advice. Please contact us to discuss your particular circumstances.