$10,000/day penalty interest rate: Developer fights lender on Karaka loan deal

221 Jesmond Rd, Karaka, which Mega planned to buy but was short $13m. Photo / Google Maps

A developer was paying an eye-watering $10,000/day in penalty interest rates to the vendor of a rural Karaka property, so hunted for a loan to quickly settle the deal.

But that has resulted in that developer losing a court battle against a funder and being charged more than $600,000 for fees associated with agreeing to the loan.

Mega Capital Group paid a partial settlement of $7 million on its $19.8m purchase of the rural land on Karaka’s Jesmond Rd, a court ruling said.

That business was then highly motivated to find the extra money because of the fast-accruing penalty interest rate it was being charged by the party selling the title.

So it agreed to borrow more than $10m from a non-bank lender but didn’t end up taking up that loan because it got the money it needed from another lender.

It is now facing calls to pay fees and other charges of $600,000-plus for signing a deal to get that money - so Mega went to court to oppose that, arguing the contract was oppressive and could not be legally enforced.

But that developer lost the case, and has been ordered to pay the money to the financier and that financier is also entitled to costs.

The High Court at Auckland heard Mega’s application to set aside a statutory demand made by financier Pearlfisher Capital which had agreed to loan it $10m-plus.

But the non-bank lender was the victor in the case because the judge ruled the developer knew what the interest rates were at the time the contract was signed, had taken professional advice and signed up to the deal to borrow the $10m-plus.

The judge gave some background to the legal dispute.

Last year, Mega struck a deal to buy rural land at 221 Jesmond Rd to develop it, agreeing to pay $19.8m for the large site.

“Mega Capital had paid approximately $7 million in deposits to the vendor of the property and penalty interest had begun to accrue at approximately $10,000 per day,” wrote Associate Judge Clive Taylor.

Property records indicate Mega owns the property now and the previous owner was Rejen Trading, directed by Russell Bersma.

To quickly get together the necessary $13m it needed to settle the deal, Mega went hunting for finance.

Pearlfisher, half-owned by sharebroking business Jardens, initially agreed to loan Mega $8.18m plus establishment fees and interest but upped that to $10.27m.

Part of the arrangement was that Mega had to use Pearlfisher director Tony Abraham’s contractors for earthwork and other civil work in the property development, Mega claimed.

But Mega got alternative finance from a different lender and ditched Pearlfisher’s loan without taking any money.

Despite that $10.27m loan being abandoned, Pearlfisher demanded Mega pay it $627,000 in establishment fees and costs for arranging that loan.

Pearlfisher Capital director Tony Abraham.

But Mega opposed that.

Jarden bought a half-share in Pearlfisher in 2017. The finance business funds lending by seeking investments from funds and high-net-worth individuals, arranging finance on an ad hoc basis for each new lending opportunity and also contributing its own funds.

The judge decided Mega’s call to set aside Pearlfisher’s statutory demand should be dismissed.

“Mega Capital is a sophisticated commercial party in the business of property development and not a vulnerable consumer. It held itself out to be an experienced property developer undertaking a major property development,” he said.

The developer received professional advice from a financial adviser, mortgage broker and legal team when negotiating the contracts.

Pearlfisher’s fees were “not so excessive” that they were oppressive, the judge decided.

“During the negotiations, and after the final agreement was signed, the parties had discussed whether certain fees were payable if the lending was not drawn down. Pearlfisher had twice confirmed that their fees would remain payable,” the decision said.

Pearlfisher had gone to the trouble of collecting the funds and depositing $8m with its solicitors so it could loan the developer the money, with the additional $2m being transferred on the day of settlement.

The lender wanted $627,699: arrangement fees of $80,000, establishment fees of $530,000 and costs of $17,699.

Ajaypal Singh, a Mega director and shareholder, swore an affidavit supporting the developer’s application to set aside Pearlfisher’s statutory demand.

Mega argued it was under huge pressure, with substantial fees accumulating against it while it tried to settle the land deal. Pearlfisher’s demand had been unjustly burdensome and Mega had not drawn down on any of the lending offered, it argued.

Mega claimed Abraham had given assurances that if they didn’t go ahead with the loan, the risk was limited to $20,000.

“Mr Singh deposes that he spoke with Mr Abraham on the telephone to inform Pearlfisher that Mega Capital would not be going ahead with their funding. Mr Singh states that Mr Abraham told him that “[Mega Capital] had no idea what he was going to do to [them].” And that he had already taken two people to court and won on both occasions,” the decision said.

Mega negotiated an additional month in exchange for paying a further deposit of $5m on the property. Penalty interest would continue to accrue at almost $10,000 each day so it needed to settle the purchase.

A broker had introduced Pearlfisher to Mega. After signing Pearlfisher’s finance offer, Mega continued to search for other finance with its broker’s help and did get the entire $13m extra to settle the deal.

Singh claimed Pearlfisher’s Tony Abraham told him that if he wanted to avoid court, he needed to agree to pay an amount on the telephone. That call ended and by last August, Pearlfisher had demanded $600,000-plus.

Pearlfisher argued Mega was a sophisticated commercial party, knew what fees were being charged and had been represented by a professional mortgage adviser, legal counsel and a financial adviser.

The judge agreed with Pearlfisher and ruled against Mega.

Abraham told the Herald after the decision was released: “Where we have contracted with a party in good faith, we expect them to fulfil their commercial obligations which they have agreed and committed to do - just like we fulfil our commercial obligations.”