Legal Essentials for Guarantors
- Mandatory Documentation: Lenders typically require a Certificate of Independent Legal Advice to ensure a guarantor understands their commitment.
- High Financial Risk: Guarantors use their personal property as security; if the borrower defaults, the lender will look to the guarantor to recover the debt.
- Solicitor’s Role: A solicitor must review loan documents and explain all legal obligations to confirm the guarantor is acting voluntarily.
- Lender Protection: These certificates protect lenders from future claims if a guarantor later attempts to challenge the guarantee.
- Historical Precedents: Landmark cases like Amadio and Garcia highlight how a lack of explanation or undue influence can lead the High Court to set aside a guarantee.
- Informed Decisions: It is critical to obtain thorough legal and financial advice before offering property as security for a third party.
A Certificate of Independent Legal Advice is an official document generally required by lenders for loans where a guarantor is required by the lender.
Guarantors secure the borrower’s borrowing capacity by offering some of their own personal property as security for the loan. A guarantor may decide to guarantee a loan for a loved one or a corporate entity where finance is needed to acquire property, a business or refinance.
Acting as guarantor involves significant financial risk. If the borrower cannot repay their loan, the lender will look to the guarantor to recover the debt. It is essential the guarantor understand the extent of their legal obligations and obtain advice before committing as guarantor.
A Certificate of Independent Legal Advice from a solicitor confirms that the guarantor is acting voluntarily and understands their legal obligations. A solicitor will review the loan documents and explain the legal obligations to the guarantor before issuing the Certificate.
Certificates of Independent Legal Advice also protect the lender from potential claims relating to the loan. Lenders will rely of the solicitor’s Certificate if the guarantor challenges the guarantee given.
In the case of Commercial Bank of Australia v Amadio a guarantee was given by elderly parents for their son. A bank manager attended the home of the parents to obtain their signatures on a mortgage without providing any explanation about the document.
The High Court held the guarantee to be an unconscionable dealing due to a lack of knowledge or education by the parents. There was an imbalance in bargaining power that resulted in the guarantee being set aside.
In the case of Garcia v National Australia Bank Ltd a wife and her husband executed a mortgage in favour of the bank to secure a guarantee for the husband’s business. The husband had assured the wife that there was ‘no danger’ in the transaction. No explanation about the transaction was given by the bank to the wife. The court held that the guarantee was void as a result of undue influence.
These cases led to lenders implementing Certificates of Independent Legal Advice for guarantors. Hence, it is important that guarantors obtain thorough legal as well as financial advice on loan documents for third parties before agreeing to act as guarantors.
