©The Sun (Used
by permission)
by Nicholas Chang Chen Seng
IN most cases in Malaysia, the purchaser of a property will seek financial assistance to finance his acquisition of the property and will apply for a loan from a financier, usually a bank. This article will attempt to explain the legal implications of such a borrower–financier relationship.
Generally, the borrower–financier relationship is purely contractual in nature, created to facilitate a lender–creditor and borrower–debtor situation. As a result of this relationship, the financier is legally deemed to be the agent payee of the borrower. This means the financier would have agreed to pay the loan sum, as part of the purchase price, to the vendor, for and on behalf of the borrower, who is usually also the purchaser.
An agent–principal relationship exists when a “principal” authorises another person to act on his behalf and the person so authorised is called an “agent”. It is pertinent to note that in a principal–agent relationship, the principal may authorise the agent to undertake or perform acts on his behalf and such acts may be capable of altering the legal position of the principal.
The financier in a property transaction has an obligation to release the loan sum only when authorised to do so and that it must be for the benefit of the borrower. This obligation suggests the existence of a relationship of trust and confidence and, as a result thereof, the financier will owe a fiduciary duty to the borrower. The fiduciary duty in this instance is the duty or obligation to ensure that the borrower’s interest takes precedence over the interest of the financier, when the financier is acting as the agent payee of the borrower.
In most loan agreements or charge documents relating to a loan granted to a borrower to finance the purchase of a property, there will be express provisions requiring the borrower to irrevocably authorise the financier to release the loan sum to the vendor, in accordance with the terms of the sale and purchase agreement. The authority of the financier in such instance is usually expressed to be unfettered. Further, in most property transactions, the financier is usually required to issue a letter of undertaking to the vendor to release the loan sum to the vendor.
One interesting question that arises from a borrower–financier relationship is whether a borrower could validly stop his financier from releasing or further releasing the loan sum to the vendor.
This question needs to be examined from three different angles.
Cannot be revoked
Firstly, when the financier issues its letter of undertaking to the vendor, such an undertaking will generally be construed strictly against the financier. This rule of construction is similar to that applied in construing a bank guarantee or a performance bond or a letter of credit. In short, if the financier elects to accept the instruction of the borrower to stop the release or further release of the loan sum, the financier runs the risk of being sued by the vendor to enforce the terms of the financier’s letter of undertaking.
Secondly, if the financier has been irrevocably authorised by the borrower to release the loan sum in accordance with the terms of the sale and purchase agreement, the financier then is under no obligation to accept the instruction of the borrower to countermand his earlier irrevocable authority. “Irrevocable” means cannot be revoked. Strictly, it would appear that a financier is entitled to ignore the instructions of the borrower to stop release or further release of the loan sum when the borrower had earlier given irrevocable authority to the financier to do so. Thirdly, there is a need to weigh the fiduciary duty owed by the financier to the borrower against the irrevocable authority given by the borrower. The key factor here is that any release of the loan sum must be for the benefit of the borrower. This means that if the borrower has legally valid reasons to terminate the sale and purchase agreement and to be discharged from his obligation to pay the purchase price to the vendor, and the financier has been served with such a notice, it would appear that the financier is required to comply with the instructions of the borrower and stop the release or further release of the loan sum. This is despite the fact that the financier may be sued by the vendor for breach of its undertaking given to the vendor.
In such a case, the reasons for the termination of the sale and purchase agreement by the purchaser–borrower must be good and valid If there are no good and valid reasons, the financier may ignore such an order to countermand the earlier irrevocable authority.
Loose ends
All loose ends can be nicely knitted up if the letter of undertaking to be issued by the financier in the favour of the vendor is worded meticulously to protect the financier in such an event. For example, the financier may expressly state that it shall only be bound to perform its undertaking to release the loan sum provided that the sale and purchase agreement remains valid, binding and subsisting and that the vendor is not in breach of the sale and purchase agreement.
In the above instance, the financier’s undertaking to the vendor would be conditional. A vendor who is in breach of the sale and purchase agreement would then not be entitled to call upon the performance of the financier’s undertaking. Even if the financier’s undertaking is not conditional, a vendor who is in breach of the sale and purchase agreement is unlikely to succeed in his bid to enforce the undertaking as his hands would be tainted by his breach of contract, and a court of law would be most hesitant to assist a party whose hands are stained.
As a last word, it would be most wise for a borrower to engage the services of an independent solicitor to, at least, peruse the letter of undertaking to be issued by his financier to a vendor, to ensure that in the event he has valid and good reasons to terminate his sale and purchase agreement with the vendor, his agent payee will not release or further release the loan sum and to avoid unnecessary legal complications.
The writer is a member of the Solicitors’ Remuneration Enforcement Committee, Bar Council Malaysia www.malaysianbar.org.my
Note: This column is brought to you by the Malaysian Bar Council for your information only. It does not constitute legal advice. You should therefore seek professional legal advice for your specific needs. Neither the Malaysian Bar nor the Sun Media Corp Sdn Bhd shall be liable to any reader who suffers losses as a result of relying on this column.