Solicitor's Certificate: A Lender's Perspective

Are you lending a significant amount of money to somebody? Are you insisting that the borrower and/or guarantor get a Legal Practitioner Certificate or Solicitor’s Certificate? If not, please read below as to why you really should do so.

Lenders often require a borrower and/or a guarantor to sign what’s called “Legal Practitioner’s Certificate” or “Solicitor’s Certificate” as part of their loan documents.   If you are a private lender thinking about lending money to someone, you should consider doing the same. Let us tell you why.

A Solicitor’s Certificate is a certificate of independent legal advice. It confirms to a lender that a borrower or guarantor has received independent legal advice and understands the potential liabilities, risks and consequences involved in signing loan documents.   Without one, the risk is that a borrower does not understand the terms and conditions of their loan and what they were signing up to and could argue in court for the loan agreement to be set aside (terminated).

It may slow the initial lending process down but it will protect your best interests for the life of the loan to ensure the borrower and/or guarantor knows what they are signing up to.

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Real life examples

Commercial Bank of Australia v Amadio [1983] HCA 14

• The pinnacle case on this topic was Commercial Bank of Australia v Amadio where some loans and guarantees were set aside due to findings that the borrowers or the persons providing the guarantee for the loan did not fully understand the consequences of signing the loan documents.
• In Amadio, parents guaranteed their son’s business loan and when he defaulted, they were next in line and responsible for the loan to be repaid plus interest and costs.  Further, having offered their home as security for the loan, effectively the bank could force a sale of their house to recoup its loss.
• In this case, it was found by the High Court of Australia that the bank had not advised the parents of their son’s unstable financial situation and they should have been told to obtain independent advice.

National Australia Bank Ltd v John Albert Rose [2016] VSCA 169

• In a more recent case, a guarantor (Mr Rose) was released of his liabilities and obligations also under a loan agreement on the basis that the bank failed to advise him to obtain independent legal advice on guarantor documents he was signing.
• In this case, Mr Rose and Mr Rice entered into a joint venture arrangement to acquire investment properties through companies they jointly controlled. Mr Rose contributed cash towards the purchases, and Mr Rice arranged for various loans from NAB for over $8 million. Mr Rose guaranteed the loans made by the NAB for Mr Rice. When the companies defaulted on the loans the bank sought to rely on Mr Rose’s guarantee.
• The Victoria Court of Appeal found that the bank had breached the Banking Code in failing to give Mr Rose prominent notice and time to review the documents, given the brevity of the meeting he had with the NAB bank manager.

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If I ask the borrower to get one what is involved by their solicitor?

In providing legal advice, solicitors are governed by the Legal Profession Uniform Legal Practice (Solicitors) Rules 2015 (the “Solicitors Rules”), standards stipulated by the Law Institute of Victoria, alongside laws and regulations surrounding Credit Codes affecting banks.

Therefore in providing legal advice, you can be best assured that the solicitor will advise the borrower of the following:-

The borrower fully understands and agrees with the terms and conditions of the loan agreements and security that is being offered for the loan (such as their home) as well as receiving and understanding all of the related documents.A lender can force a sale of the property that the borrower has offered as security for the loan in order to recover the unpaid monies plus default interest and any other fees/costs of the default (i.e. taking possession of the property and selling it).The borrower is aware of the repayments required and that they need to have the income to service these repayments, and explain that they should obtain appropriate advice from their accountant and/or financial advisors.

And similarly, for a guarantor, they will ensure that person understands that if the borrower defaults under the loan, whatever security they might have provided under their guarantee may be sold by the bank to recoup the amount owing under the loan plus any default interest and other costs incurred.

A solicitor will also be required as part of the advice process to verify the identity of the borrower.

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What if I don’t require a Solicitor’s Certificate from a borrower?

This is similar to asking, “what if the borrower or guarantor doesn’t fully understand what they are signing?”   Various things could happen if one is not obtained, including:-

• The borrower not understanding their loan interest rates, whether loan fees and charges are to be deducted from the loan funds, leaving the borrower with less in their pocket to spend than anticipated.
• The wrong security property being used for the loan;
• The guarantor not being fully aware that their own home can be used as security, and sold if the borrower’s property equity is not enough to satisfy the debt on default;
• The interest rate or terms of repayment are glossed over only for you to realise later what a bad deal you they got.

These could be grounds for the borrower or guarantor applying to Court to have the loan set aside, and the loan then not being repaid.

If you are considering private lending and would like our assistance, please contact our reception to arrange an appointment with one of our securities team lawyers or book an appointment online.

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Disclaimer: The information in this post is general in nature. This does not constitute legal advice and should not be relied on as such. Please contact one of our Lawyers if you are seeking advice about a specific legal matter.

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