Tribunal says net rental clause unfair

In equipment lease agreements, the unconditional payment (net rental) obligation is the cornerstone of the contract from the financier’s point of view. Come ‘hell or high water’, the hirer is obligated to pay its instalments on time and in full. It must never miss a beat.

In Abraham v Gogetta Equipment Funding Pty Ltd [2017] NSWCATCD, the NSW Civil and Administrative Tribunal (“NCAT”) commented that a typical net rental clause was not necessary to protect the legitimate interests of the financier. The context was the new business-to-business (“B2B”) unfair contract laws. The tribunal went on to observe that any loss the financier might incur from the hirer ceasing to pay rent in that case could be offset from legal action against the vendor/supplier for defective goods.

These comments represent a radical departure from a long standing and well understood body of law. Firstly it is difficult to comprehend how the payment of rent would be other than central to the parties’ respective commercial objectives. The lessee gets to use equipment to which it would not otherwise have access, and the financier earns a return on an investment it would not otherwise make. Legal action against the vendor for faulty equipment would be problematic and unlikely to compensate the financier for its loss of bargain upon lessee default anyway.

The case was decided against the lessee on other grounds, so ultimately no injustice was done. However the comments are disturbing. They are also illustrative of the risks to which financiers are exposed when a dispute is ventilated outside the conventional legal system, and the adjudicator lacks a full appreciation of the principles of finance.

A charging clause in terms & conditions: use it or lose it

For less credit-worthy customers an equipment financier may enhance its security by including in the lease terms and conditions a ‘charging clause’. This is a provision which says that in it addition to its payment and other obligations under the lease the lessee will also grant security over some or all of its other property, such as land, motor vehicles and other equipment.

The charge is granted in favour of the lessor/financier and is intended to be activated if the lessee defaults in its payment obligations during the term of the lease. The activation generally occurs by the financier lodging a caveat over land owned by the lessee.

However, a problem can arise if the lessee grants a mortgage over that land to another lender at any time after the date on which the lessee signed the equipment lease. The question is, whose security over the land should prevail: the financier’s caveat or the lender’s mortgage?

Just such an issue came up in the recent Victorian Supreme Court case of GoGetta Equipment Funding Pty Ltd v Mark & Liz Pty Ltd [2018] VSC 91. In that case the lessee had signed several motor vehicle leases with the GoGetta in late 2014, but went into default in almost immediately. GoGetta however did not lodge their caveat until November 2015, well after a third party lender (Mark & Liz) had, pursuant to an unregistered mortgage lodged their own caveat over the lessee’s land in the preceding June.

The court followed the general rule to decide that the party whose registered caveat appeared first in time would prevail – that is, Mark & Liz. However, the decision was not clear cut because both parties’ conduct had left them exposed to the other. One other thing that counted against GoGetta was that it failed to lodge its caveat when the lessee first went into default. Instead GoGetta waited for some time to see if the customer could restore his account.

The lesson for an equipment financier is that if it chooses have a charging clause in its terms & conditions the clause needs to be used as stated, not kept in reserve until the last minute. If the clause had said that the caveat would be lodged anytime following a period of grace allowed to the customer then GoGetta as caveator might have had a better chance of recovery.

State tribunals have no interstate reach

As a timely curb on the potential overreach of State tribunals in commercial dealings, the High Court has ruled that the New South Wales Civil & Administrative Tribunal (“NCAT”) is not, for constitutional reasons permitted to hear disputes between residents of different States.

The effects case, Burns v Corbett [2018] HCA 15 will primarily be felt in residential tenancy and retail lease matters. That is because such cases comprise the bulk of the work of State dispute resolution tribunals. An equally recent amendment to NSW’s NCAT Act will enable the relevant dispute to be a referred to a court if NCAT lacks jurisdiction.

However, referring a tribunal matter to court means that the issue of legal costs become a factor. A prime consideration for taking a complaint to NCAT is that parties are by and large self-represented, in theory therefore incurring minimal expenses. The decision in Burns v Corbett effectively closes off the low cost route if a one of the parties such as a landlord or a financier is based interstate.