Independent Legal Advice Certificate

Independent Legal Advice Certificate

 

What is independent legal advice certificate?

Guaranteeing a loan or debt of another is a serious obligation that should not be taken lightly, and you need to do your due diligence and get unbiased professional advice.

 

What is a guarantee?

 A guarantee is an assurance or promise.

The person who guarantees a loan agreement is called a guarantor.

The guarantor provides security for an asset, such as a mortgage on a property.

They guarantee that the debt will be paid.

The guarantor takes responsibility for any debt owed to the lender if the borrower fails to meet their obligations.

If the guarantor cannot pay, the bank may sell their assets, including their home.

The bank can sell any mortgaged assets in any order it chooses and does not need to sell the borrower’s assets before the guarantors.

 

Who can be a guarantor?

Guarantors can be parents who support their children on a home loan. Spouses or de facto partners may also have to guarantee debt in certain circumstances in business.

The beneficiaries of a family trust or self-managed super fund must also sign as guarantors.

 

When is independent legal advice required?

Banks and other lenders may require a guarantor to obtain independent legal advice.

This ensures that all potential implications are explained and understood before the guarantor enters into a binding and enforceable agreement.

 In Qld there the legal advice must be provided in the form of a document: Independent Solicitor Certificate

 

Liability of the Guarantor in the Event of Default by the Borrower

 

If the borrower defaults under the loan agreement, the guarantor is liable for remedying that default.

In addition, the guarantor must pay the amount owed by the borrower, interest, default interest and a variety of other costs, such as the cost of maintaining the property until it is sold and the associated legal fees with the sale.

 

What is the liability of a guarantor?

 

The liability of a guarantor depends on the terms of the contract.

The guarantor’s liability may be limited to a certain amount.

However, a document may also specify that the guarantor’s liability is increased, and the guarantor’s rights or obligations about the collateral may be limited or restricted.

Assumption of financial risk without consideration

Taking on a surety is a serious commitment.

• Generally, a guarantor takes a financial risk without receiving anything in return.
• Be aware that the lender may assert its rights against the guarantor even if it has not charged the borrower.
• If the guarantor fails to rectify the borrower’s payment default, the lender can sell the secured asset to recover the amount owed.
• In addition, the lender can sue the guarantor personally for any shortfall.

 

Do you need independent legal advice?

Independent legal advice for a guarantor serves several purposes. First, it reassures the bank or financial institution that the guarantor knows their legal obligations and protects the guarantor from rogue transactions.

Banks and financial institutions may insist that a guarantor obtain independent legal advice to prevent frivolous transactions.

 

How important is independent legal advice when providing a guarantee?

If you are considering acting as guarantor for a loan, it is essential that you obtain advice from an independent solicitor before signing any document.

 

Certificate from an independent lawyer (personal guarantor).

This certificate, also known as a personal guarantee certificate or legal advice certificate, certifies that a person has taken independent legal advice about the risks and obligations involved in guaranteeing someone else’s loan.

Such a guarantee usually requires you to provide a release of liability to the lender.

 

Why does the bank recommend that the guarantor obtains independent legal advice?

 

It is almost always required when a bank lends money to a company or when a trustee is named as the primary borrower.

It is also increasingly common for parents or other family members to personally guarantee their children’s loans.

In all these arrangements, the lender requires an independent lawyer to certify that the guarantor has been legally advised about what he agrees to.

The term ‘independent’ refers to the fact that the lawyer giving the legal advice is independent of the lender or borrower of the loan or financial arrangements.

 The lawyer must certify that: 

1. They have given you the legal advice you need
2. You have understood them. 

Only after the lawyer has given you the legal advice and you have understood your responsibilities should you decide to provide a personal guarantee and indemnity.

 

Here are a few basic things to consider when making your decision.

• There are no benefits apart from goodwill.
• A surety and guarantee benefit the lender and the borrower.
• As a guarantor, you only have a disadvantage if you are required to pay because of the borrower’s default.
• The only benefit you have is the feeling of gratitude for having helped a business or family member.

 

They do not magically disappear.

A guarantee and indemnity last for the life of the loan (upto 30 years for a home loan unless it is sold beforehand).

 YOUR PERSONAL FEELINGS DO NOT MATTER!

 Many guarantors are family members of the borrower, usually a spouse or parents.

In the event of a breakdown in the family relationship, the guarantee and indemnity does not cease.

It will continue even if there is a divorce, separation or severance – You cannot simply opt-out if you are no longer involved in their lives.

You cannot revoke a guarantee and indemnity without the written and signed consent of the lender.

Typically the lender will never agree to release you as a personal guarantor unless the entire loan is paid off or arrangements are made for another personal guarantor to take over.

 

You risk everything

The guarantee and indemnity you give are personal. It is secured (or collateralised) by any property, savings, funds or other assets you own now or acquire later.

If the lenders want to pursue it – they can take everything to recover their money and losses.

 

It outlives your death.

A surety bond and indemnity will outlive your death (usually), and your estate can then be held liable for payment of any sums owed under the bond.

These are just some of the essential aspects of a guarantee and indemnity in favour of another.

So what do you need to do to get legal advice and a certificate from Carolyn Ryder?

 

Be organised with the correct documents

The lender will send you several documents by post (or by email) addressed to you as a personal guarantor.

Once you have received all these documents, you must read them carefully yourself. They should contain the following;

 

1. The actual loan documents between the borrower and the lender.
2. The lender’s standard terms and conditions
3. The guarantee and indemnity deed in your name.
4. The lender’s draft independent solicitor’s certificate.

 

Contact us when the above steps have happened, and we can then start the process.

 

We will ask you to provide us with a copy of all the documents to read through them before we make an appointment to give you the advice you need.

This appointment usually takes about 45 minutes to 1 hour and may only be attended by you.

After we have given you advice, we will issue you a certificate of recommendation from an independent solicitor, which will meet the lender’s requirements.

 

What does an independent legal advice certificate cost?

 

We charge a fixed fee of $550 for up to two people (inclusive of GST) for legal advice and an independent solicitor’s certificate to advise a loan guarantor.

If the loan or financial arrangements are particularly complex or involve multiple parties, we may need to provide you with a quote after receiving the documents and before we give the advice. Get in touch with us today.