A recent decision of the High Court gives some guidance to lenders about the type of costs they might recover through the fees they charge borrowers.
This decision follows the High Court’s decision of last September,
Commerce Commission v Sportzone Motorcycles Ltd (in Liquidation) and others  NZHC 2531, which established a narrow test for whether lenders’ fees, charged to borrowers under a credit contract, are reasonable for the purposes of the Credit Contracts and Consumer Finance Act 2003 (the
In short, that test required that the costs a creditor seeks to recover through a fee must be sufficiently close and relevant to the establishment, administration, maintenance or consequences of the relevant loan, such that it can reasonably be said that the cost was incurred in connection with, or in relation to, the matter giving rise to the fee. This has been referred to as the “close relevance test”. The Court accepted that there was no “bright line” in applying this test, though it indicated that variable costs connected with or related to the activity to which the fee relates will generally be recoverable by fees, whereas fixed costs may be recoverable but face a “strict application of the close relevance test” or require a causal connection.
In a judgment made public on 21 October, the High Court has now attempted to apply the close relevance test to the particular fees charged by the lender in
Sportzone.1 In this recent judgment (the “quantification judgment”) the Court has adopted a highly granular approach, examining line-by-line the various costs incurred by the lender and identifying in each case a specific percentage of the cost recoverable as fees. The categories of recoverable costs included:
staff salaries (including temporary staff where applicable) and payments under staff performance schemes;
premises costs (which included costs of storage rental, office rental, rates, energy costs, insurance, security and cleaning, maintenance, and depreciation of fixtures and fittings);
charges imposed by the Land Transport Safety Authority for vehicle checks; and
IT hardware and software depreciation.
However, the Court also ruled that certain costs could not be recovered as fees. Notably, these included treasury and capital costs. The Court held that, in the context of a money-lending business, these are part of the cost of funds - a “company overhead” referable to general business, rather than the sort of operating costs that might be recoverable through fees. The Court also held that bad debt expenses could not be recovered through default fees, and that borrowers in temporary default should not be obliged to pay fees designed to protect a lender from those defaulting permanently. Rather, bad debts were “a cost of being in the business of lending,” to be recovered through the interest rate.
In addition, some cost items were deemed likely to fail to meet the close relevance test unless shown to be particularly closely connected and relevant to a particular loan. These included training costs, travel costs, directors’ fees, and accounting, legal and audit fees.
Lenders may yet take comfort from other aspects of the judgment, in particular the Court’s ruling that fees can be subsequently justified on a different basis to that which was initially applied in setting the fee. It should also be noted that while the findings in
Sportzone demonstrate the Court’s preference for a narrow interpretation of the CCCFA, the findings are tied to the particular circumstances of the lenders in that case.
The defendant creditors have appealed both last year’s liability judgment and also the recent quantification judgment. It is therefore not yet certain that the close relevance test will survive, and if it does, how it will be applied in practice. The Court of Appeal will hear the case on 19 and 20 November this year.
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.