Increasingly, banks and other credit providers are insisting on people and business entities that borrow funds to obtain a solicitor’s certificate in relation to their loan documents and particularly if there is a deed of guarantee required. Many of our clients are frustrated that this requirement was not made known to them by their bank or lender at the time the loan was approved, nor are they prepared for the additional legal costs incurred with their lawyers for providing a solicitor’s certificate.
Why do the banks require a solicitor’s certificate to be provided?
Banks and other lenders require a solicitor’s certificate in order to shift the risk of the loan and or the guarantee involved over to the customer.
This has come about because of cases decided in the courts, such as Commercial Bank of Australia v Amadio [1983] HCA 14, where some loans and guarantees have been set aside due to findings that the borrowers or the persons providing the guarantee did not fully understand or appreciate the consequences of signing the loan documents.
The Amadio case developed the test of unconscionable conduct.
The Amadio’s secured their son’s business loan and when the business failed, the Commercial Bank sought to enforce the guarantee.
The Court found the bank had taken unconscientious advantage of the Amadio’s, who spoke very little English and had minimal business experience, by failing to advise them as to their son’s already shaky financial circumstances and failure to advise them to seek independent advice.
A more recent example of this was in National Australia Bank Ltd v John Albert Rose [2016] VSCA 169 where the Court dismissed an appeal by NAB against a lower court decision which allowed Mr Rose to abandon his guarantor liabilities. The trial judge found the banking manager in this case had failed to advise Mr Rose that he should seek independent legal advice on the guarantor documents. This decision allowed Mr Rose to walk away from liabilities which were in excess of $3.8 million dollars.
Another good example of this is where an elderly parent provides a guarantee for a loan of their adult child and offers their unencumbered family home as security for the loan. The perils of this were illustrated in Fast Fix Loans v Mladenko Samardzic [2011] NSWCA 19 where elderly parents mortgaged their home in order to secure their son’s borrowings.
One of the factors the Court considered were that the parents were not legally represented.
The Court found a solicitor had translated the solicitor’s certificate to them but failed to provide advice regarding the effect of signing the Guarantee.
Fortunately in this case, the Court found the guarantee was unjust and released the parents from their obligations. However the stress and expense of the litigation in order to have the guarantee set aside should not be underestimated.
Whilst in other cases the child may have all the best intentions to repay the loan and not expose their elderly parent to default, unfortunately this commonly happens and the bank then calls in the security of the elderly parent’s home.
It is for these reasons that the bank or finance company attempts to shift the risk over to the customer and effectively hide behind the solicitor’s certificate to show that their customers knew what they were getting themselves into when they entered into the loan agreement and or provided the guarantee.
A solicitor’s certificate can vary from bank to bank and other financial institutions but basically the solicitor must certify that:
- The people obtaining the loan fully understand and agree with the terms and conditions of the loan agreements and security that is being offered for the loan (as well as receiving and understanding all of the related documents)
- That if there is a default, the bank can sell up the property that they have offered as security for the loan to recover the unpaid monies plus default interest and any other costs of the default (i.e., taking possession and selling the property etc.)
- That the clients are aware of the repayments the loan agreement will require them to pay, that they have the income to service these repayments, and that they have obtained appropriate advice from their accountant and/or financial advisors.
- If there is a guarantee, the person providing the guarantee understands that if there is a default under the loan, whatever security they have provided under their guarantee (most of the guarantees relate to ALL their assets) may be sold by the bank to recoup the amount owing under the loan plus any default interest and other costs that they incur in the process.
A solicitor’s certificate is usually a lengthy and complex legal agreement that challenges the most experienced lawyers, let alone lay persons who have little or no dealings with banks other than to buy or sell their home.
It is very difficult to provide proper advice and gain a client’s ‘informed consent’ to those documents in one appointment – and yet the banks require a lawyer to formally ‘certify’ the clients fully understand those documents. It is little wonder many lawyers refuse to provide this service.
Why does it cost for the solicitor to provide a solicitor’s certificate?
The potential monetary risk of providing the solicitor’s certificate by the lawyer is equal to the amount of loan or money being borrowed or alternatively being guaranteed in the transaction plus interest and recovery costs.
If the solicitor has not properly advised the customers in relation to the above issues, it is possible that they (or the bank) could join the solicitor in any proceedings alleging the bank had not properly advised the customers of the full implications of the loan or guarantee.
In other cases they could be sued by the banks when they attempt to shift the blame if it is found that customers were not fully informed of or did not properly understand their liabilities under the loan or the guarantee.
It is for this reason that solicitors must be very careful about providing advice to their clients and completing a solicitor’s certificatefor the benefit of the banks or the lenders.
The loan documents and deed of guarantee must be very carefully perused by the solicitor, as well as all of the ancillary documents associated with the loan (i.e., the letter of offer, schedules, standard terms and conditions etc.). In many cases there is urgency attached to having the mortgage documents and guarantee signed because it is provided shortly prior to the settlement date.
This adds to the pressure and risk associated with providing the solicitor’s certificate. If things go wrong with a loan, the people who borrow the money quite often blame others for not advising them properly.
It is for this reason that the lawyer giving the certificate must be extremely careful and ensure the clients fully understand what they are signing and the consequences of a default. This means carefully reading and absorbing a large bundle of documents and providing advice to clients in a way that they understand what they are signing.
The lawyer must also keep careful notes of the advice provided and confirm this in writing in order to comply with professional standards and their indemnity insurance policy.
The issues which the certificate covers are critical, particularly if there is a future default under the loan and the clients allege that they did not fully understand the terms and conditions of the loan and or the guarantee (this happens quite often).
It is difficult for clients to understand solicitors cannot just witness documents or signatures. Whenever lawyers witness a legal document, there is a presumption that they are providing advice in relation to the document that is being witnessed.
It is for this reason that our firm and most lawyers will not agree to witness a solicitor’s certificate without providing formal advice and charging a fee.
How can lawyers help with a Solicitor’s Certificate?
If a solicitor’s certificate is not carefully considered and appropriate advice given to the clients, the lawyers face the risk of being involved in expensive litigation in circumstances where the only person benefiting from the certificate are the banks.
The professional indemnity insurers for lawyers are very strict in relation to their requirements for solicitors providing these certificates.
The NSW Law Society and the professional indemnity insurers, LawCover, recommended to its members and insured firms to be exceptionally wary and listed strict guidelines for practitioners to follow when giving these certificates.
Attwood Marshall Lawyers have always offered to provide these certificates to their clients at a reasonable fee. If you have a document that requires a solicitor’s certificate to be signed, please contact our Property and Commercial Department Manager, Jess Kimpton on direct line 07 5506 8214, email jkimpton@attwoodmarshall.com.au
