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What are solicitor’s certificates

When do lender’s require solicitor’s certificates?

Lender’s require solicitor’s certificates from parties to loan arrangements in a few different circumstances, which commonly include:

  1. Third party guarantees:  If a guarantor promises to make good the default of a borrower, even though the loan funds have not been advanced to the guarantor.

  2. Unusually onerous loan terms:  If a borrower is entering into a loan with unusually onerous loan terms, such as a ‘low doc’ loan with a short term and high interest rates.

In both of these instances, lenders will often require the obligor (i.e. the third party guarantor or borrower under an onerous agreement) to obtain independent legal advice and insist on the provision of a solicitor’s certificate before advancing funds.

The commonality lenders are concerned about in these instances is that the obligor is making promises which are not necessarily in their best interest – either by promising to repay amounts which weren’t advanced to them and for which they may not have received the benefit (the guarantor scenario), or by entering into a loan with onerous terms. 

Lenders are seeking to guard against the risk of the obligor turning around and saying they didn’t understand what they signed, and it is not reasonable for them to be held to the agreement.

Third party guarantees

There are times when the borrower’s obligations under a loan arrangement will need to be supported by a third party guarantee. In these circumstances, the guarantor agrees to be liable for part or all of the borrower’s obligations under a loan arrangement, even though they are not obtaining the benefit of the loan funds. Common examples include where a parent agrees to act as guarantor for their child to assist them with the acquisition of a home, or where the borrower is an entity (company or trust) and the directors are required to guarantee the obligation of the borrower.

In situations where banks and lenders extend loans to borrowers subject to a third-party guaranteeing repayment, it’s common for the lender to require the guarantor to seek independent legal advice. This ensures the guarantor understands their rights, responsibilities, and the potential repercussions if the borrower fails to meet repayment obligations. This is often referred to as requiring an “Acknowledgment of Independent Legal Advice” or simply a “Solicitor Certificate.”

Onerous loans

Not all finance is equal, and there are circumstances where lenders will lend money to borrowers on terms which are onerous.  These are typically non-bank lenders, who are providing short term loans on the basis that funds are being available for a business purpose.  In these circumstances, the loan terms are so onerous (high interest rates, harsh default provisions etc) that the lender’s insist on the borrower obtaining independent legal advice as a means of protecting themselves against the borrower subsequently disputing the enforceability of the loan on grounds that they either didn’t understand the terms, or that the terms were unreasonable. 

A significant amount of caution needs to be taken in this context, by both the solicitor (who must ensure that the borrower truly understands the loan terms and is signing freely and voluntarily) and the borrower, who should consider whether there are more sensible options to borrowing on such adverse terms.

Understanding Solicitor’s Certificates

A solicitor’s certificate may differ among various banks and financial institutions, but fundamentally, to obtain this certification, the solicitor must confirm to the lenders, the party being required to obtain a solicitor’s certificate fully understands the terms and conditions of the loan and all associated documents (such as a guarantee and security documents).

The implications of a default, include;

-Whether the bank reserves the right to sell the property provided as collateral for the loan to recover outstanding amounts; and

-That the guarantors should have sought appropriate guidance from their accountant and/or financial advisors, as to their ability to enter the arrangement from a financial perspective.

The important thing to note is that a solicitor’s certificate is not a ‘tick box’ exercise or a case of the solicitor simply witnessing a signature. The solicitor must open a file, carefully review all relevant documents, provide advice to the client on the effect of those documents, verify the client’s identity (typically in person) and then certify to the bank that the client is entering into the transaction freely and with full understanding.

Legal Understanding and Free Consent

A solicitor providing a solicitor’s certificate must certify to the lender that their clients understand what they are signing and that they are signing it freely. This goes beyond mere acknowledgment of the document’s contents; it entails a comprehensive understanding of the legal ramifications involved. The solicitor must ensure that their client is fully informed and capable of making an autonomous decision.

How the law in relation to solicitor’s certificates evolved

In the case of Commercial Bank of Australia v Amadio (1983), the High Court of Australia found against the bank in relation to a contract it entered into with Mr and Mrs Amadio. The couple were elderly and spoke little English but signed as guarantor for their son. When the son’s business went into liquidation, the bank demanded that the Amadios meet the payments as per their requirements as guarantors. They were not able to meet the obligations of the guarantee and the case went to the High Court of Australia where the majority held that the Amadios lacked the capacity to understand the terms, and that the bank were aware of this. The court found that the bank acted in an unconscionable manner[1].

Had the Amadios consulted legal advice prior to signing these documents, it would have prevented the cost and stress that ensued in this case. The ruling of the case emphasised the duty of banks to ensure that borrowers and guarantors fully comprehend the terms of their agreements, thereby highlighting the significance of solicitor’s certificates in facilitating informed decision-making.

[1] Commercial Bank of Australia v Amadio (1983) 151 CLR 447; [1983] HCA 14.

How can we help?

Solicitor’s certificates serve as a cornerstone of legal integrity in banking transactions. They provide assurance that all parties involved have received appropriate legal advice and have consented to the terms of the agreement freely. Jim’s Legal is experienced when it comes to providing independent advice to its clients in relation to loan agreements.  If you are being required to obtain independent advice in regards to a loan agreement, contact Jim’s Legal to obtain practical and expert advice by calling 131 546 or emailing your enquiry to info@jimslegal.com.au.  We look forward to being of assistance.