LVR Breaches and Andrews

Posted by: at 6:02 PM on May 8th, 2014

May 08, 2014

The High Court Decision in Andrews v Australia and New Zealand Banking Group Ltd [2012] HCA 30 leaves open the possibility of increased interest charges as a result of being in breach of LVR covenants being construed as unenforceable penalties.

The case reviewed various fees and charges levied by ANZ Bank including dishonour fees, late payment fees, overlimit fees.

The Court clarified that charges could be classified as a penalty even if they did not arise out of the breach of a contractual obligation. The question was one of form rather than substance and could not be overcome by simple drafting devices. To avoid classification as a penalty the amount in question could not be extravagant.

The Court harked back to an old distinction:

"[I]t appears, that the question for the Court to ascertain is, whether the party is restricted by covenant from doing the particular act, although if he do it a payment is reserved; or whether according to the true construction of the contract, its meaning is, that the one party shall have a right to do the act, on payment of what is agreed upon as an equivalent.  If a man let meadow land for two guineas an acre, and the contract is, that if the tenant choose to employ it in tillage, he may do so, paying an additional rent of two guineas an acre, no doubt this is a perfectly good and unobjectionable contract; the breaking up the land is not inconsistent with the contract, which provides, that in case the act is done the landlord is to receive an increased rent"

A breach of an LVR covenant in a finance facility was commonly drafted as a contractual breach which entitled the financier to charge at penalty interest rates. The decision in Anderson leaves the question of recovery of penalty or default interest open, and the availability of an action in the hands of a borrower to recoup overpaid interest to be determined by examination in the case of each facility.

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