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Keep managing mortgage risk24 July, 2018
Table of contents
- Additional mortgage downloads
- Amadio claims
- Improvident transactions
- Mortgage fraud
- No or inadequate security
- Advice on equity release products
- LPLC Checklist: Advice on equity release products
- Taking instructions
- The effect of the transaction
- Issues of duress
- LPLC Amadio Checklist
- Appendix One
- Appendix Two
- Appendix Three
- Appendix Four
- Appendix Five
- Appendix Six
Table of contents
- Additional mortgage downloads
- Amadio claims
- Improvident transactions
- Mortgage fraud
- No or inadequate security
- Advice on equity release products
- LPLC Checklist: Advice on equity release products
- Taking instructions
- The effect of the transaction
- Issues of duress
- LPLC Amadio Checklist
- Appendix One
- Appendix Two
- Appendix Three
- Appendix Four
- Appendix Five
- Appendix Six
Additional mortgage downloads
From 1 July 2015 to 30 June 2017 LPLC has received 43 mortgage claims at a total estimated cost of $3M.
Smaller law firms continue to be more vulnerable to these types of claims.
Of the 43 claims, only three were Amadio claims, which is a significant reduction from the previous five years.
These are matters where practitioners advise mortgagors who make equity in their properties available to secure loans being made to others – usually a relative.
The biggest risks in mortgage claims are:
- no or inadequate security
- Amadio situations where the security provider is not the borrower
- delay in pursuing recovery of the money or registration of the mortgage
- mortgage fraud
- breaches of the Consumer Credit Code
New and varied practitioner’s certificates, especially relating to self-managed superannuation funds, are still being generated. Practitioners must be on their guard to ensure they comply with rule 11 of the Legal Profession Uniform Legal Practice (Solicitors) Rules 2015, which provides that practitioners are only permitted to use the Law Society of NSW or Law Institute of Victoria form of certificates.
Given these developments and the number of mortgage claims, there is no room for complacency in this area. The adage ‘prevention is better than cure’ is never more true than in this area of the law.
In this landmark case impacting on the involvement of practitioners in lending transactions, the High Court held that a mortgage and guarantee provided by Mr and Mrs Amadio to support an overdraft facility to their son’s building company should be set aside.
This was in light of the bank’s unconscionable conduct in obtaining execution of the mortgage and guarantee when it should have been evident that the couple was under a special disability, namely:
- their age and limited English
- their reliance on their son in business matters without the benefit of independent advice
- the circumstances in which the documents were signed.
As a result of the Amadio case and others which followed, the need for security providers (including surety mortgagors, guarantors and direct borrowers) to receive independent legal advice in lending transactions has become a regular part of the lending procedure in Victoria.
Lenders now commonly stipulate that security providers must receive independent legal advice from a practitioner before signing the documents and the practitioner must sign a certificate confirming the advice has been given.
A large number of practitioners have been sued by both security providers and lenders regarding the advice given or the lack of it!
Such claims are known as Amadio claims and they commonly occur in the following ways.
- The practitioner provides a certificate that advice was given and it is later contested.
- An unrepresented security provider alleges the practitioner either acted for them or owed them a duty and failed to protect their interests.
Practitioner’s certificate claims
In this type of claim the practitioner is asked to provide a practitioner’s certificate to the effect that the documentation relating to the transaction was explained to the security provider. This advice is then disputed and it is often alleged that the practitioner did not adequately explain:
- the full extent of the amount secured by the documents or
- that action might be taken against the security provider to recoup the funds, such as forced sale of the security provider’s home and financial destitution.
Risks of providing a practitioner’s certificate
LPLC’s claims experience shows that providing practitioner’s certificates can be risky business.
Some practitioners and firms refuse to provide certificates other than to existing clients because they regard the risk as too high. They regard clients who ‘walk in off the street’ as a particular risk.
Other firms have a policy that only one person in the office is authorised to provide practitioner’s certificates. This controls the types of clients for whom certificates are given and the quality of advice provided.
The claims experience reveals two high-risk categories.
1. New clients
The highest risk category of practitioner’s certificate claims are new clients, particularly clients who walk in off the street. It also includes referrals from relatives, a bank, finance broker, agent or other third party. A problem we typically encounter is that the practitioner treats the attendance as a request for mere witnessing of documents, rather than an occasion calling for the provision of professional advice and as a result, fails to follow the LPLC recommended procedures detailed on pages 9 to 12 of this guide.
In one claim a finance broker had been assisting a borrower with various loans for about three years. For one of the loans the broker drove the borrower client to the practitioner’s office to witness the signing of the loan documents which had been posted to the practitioner’s office.
The practitioner saw the client and provided a practitioner’s certificate as required by the lender.
The practitioner was unaware the client suffered a serious mental disorder but given the long-standing relationship between the finance broker and the borrower, it is likely their broker was aware of the borrower’s condition.
Years later the client defaulted and ultimately the security property (the client’s home) was sold.
The client alleged the practitioner:
- had a conflict as the practitioner was acting for the finance broker
- was negligent by failing to explain the loan documents to her and advising her to seek financial advice.
The practitioner’s usual practice was to advise the client in conference on the general nature and effect of the documents. There were no file notes and no letter was sent to the client confirming the advice given in conference.
This claim highlights the importance of being vigilant when providing a practitioner’s certificate, especially when new clients are referred to practitioners on an ongoing basis from one source such as a finance broker.
2. Third-party security providers and acting for more than one party
The second high-risk category is guarantors or third-party mortgagors in a transaction where the practitioner or firm is also acting for the borrower. The practitioner often fails to appreciate the security provider’s different interest to the borrower and the prohibition in Rule 8.6 of the Professional Conduct and Practice Rules − now rule 11 of the Legal Profession Uniform Law Australian Solicitors’ Conduct Rules 2015. Copies of both of these rules are in Appendix Three.
Even though rule 11 of the Legal Profession Uniform Law Australian Solicitors’ Conduct Rules 2015 is in more general terms than old rule 8.6, LPLC’s view is that the requirements in the old rule 8.6 continue to be applicable in determining whether there is a conflict at common law.
Firms are encouraged to develop criteria for when they will provide practitioner’s certificates and a protocol based on our recommendations. They must also comply with rule 11.3 and only use the specified forms of certificate.
Parent and child claims
A common scenario is practitioners advising third party security providers who are parents providing security for a loan to their child, often to support the child’s business.
In one claim, a 76-year-old mother signed several loan agreements, mortgages and variation of mortgages over several years in connection with loans to her son. The mother and son were involved in a number of property development projects.
The son defaulted and the lender sought possession of the mother’s home. The mother, who was a pensioner, claimed she did not read or write English and did not understand what she was signing. She alleged the practitioner had not explained the documents to her or engaged an interpreter.
The practitioner was adamant that he had explained the documents to her and she understood what she was signing. However, it was difficult to prove what advice was given as there were not file notes for all attendances.
This claim highlights how:
- an Amadio-type claim can arise even where a client is known to the firm
- important it is to:
- keep good files notes for all attendances
- explain in strong terms the obvious practical implications of entering into a transaction, particularly in light of a client’s financial position. This is especially important where the client is on a pension and elderly.
In another claim involving a mother and son, the son ran a building company which was in financial difficulty. In 2009 the son convinced his mother to mortgage her home and arranged for her to attend the practitioner’s office. The son failed to repay the loan and the mortgagee sought possession of the mother’s home.
The mother alleged her son was present during the meeting with the practitioner. She also said that she did not understand what she was signing as she suffered from cognitive impairment since 2006 and probably had Alzheimer’s disease.
The practitioner said he spent approximately one hour explaining the documents to the mother, that the son was not present and he did not believe she lacked capacity. The matter settled for a nominal contribution but this claim highlights the need to be vigilant about issues of capacity and undue influence, especially where the client is elderly.
For another example of this sort of claim see the case of Provident Capital Ltd v Papa  NSWCA 36. There is a summary of this case under Improvident transactions on page 23.
Claims by spouse / de facto
Claims arise where one party takes on the debt of a partner by providing security as a third-party surety or giving a personal guarantee.
In one claim Ms Brown lent money to Mr Smith on two occasions. The security for the loan was property owned by Ms Brown and property being purchased by Mr Smith. It was alleged the practitioner acted unconscionably because he had a conflict and did not inform one party to seek independent legal advice. The practitioner believed he only acted for one person, Mr Smith. Ms Brown alleged the practitioner also acted for her in relation to the loan and payment of funds by her to Mr Smith. It was also alleged the practitioner knew Mr Smith was in financial difficulty.
☑ If the client is the borrower, ask why they are borrowing the funds.
Ask the client why they are borrowing the money. This may alert you of the need to caution the client about entering into the transaction. For example, the advance may be obtained by a parent to fund a business operated by their child. The parent would benefit from being told they need to obtain independent financial advice about the business. The business may be operating at a loss or unlikely to succeed and the client needs to understand they will be liable to prepay the loan regardless of whether the business succeeds or fails.
A client who fully understands this sort of transaction is more likely to want to put in place measures to protect their investment such as documenting a loan between the parent and child or transferring an interest in the business to the parent.
☑ If a client has limited English, use an independent interpreter.
This will protect you from any later allegation by clients not conversant in English that the transaction was not properly explained because you spoke in English. Obtain a form of confirmation from the interpreter that your explanation and the client’s statements were translated before the documents were signed.
If you speak the client’s language you do not need an interpreter but you may be asked to verify your proficiency if the certificate is ever challenged.
Under no circumstances should you use the borrower as an interpreter when advising a security provider. You are providing independent legal advice and the borrower will not be seen to be independent.
☑ If there is more than one security provider, consider if there is a conflict.
All the security providers’ interests may not be the same. One may have more assets at risk than the other. Consider whether there is a conflict of interest that prevents you from advising more than one of the security providers.
☑ When advising a surety mortgagor or guarantor, be sure to do so independently of the borrower.
Borrowers should never be present while you advise the security provider. We have seen cases where security provider clients have alleged the practitioner ought to have been aware they signed the document under pressure from an interested party. Satisfy yourself that there is no question of undue pressure or duress, particularly in those cases where the borrower is receiving the benefit and the security provider is taking all the risk.
☑ Always ask why the security provider wishes to become a party to the transaction and record the answer.
Enquiring why the security provider wants to enter into the transaction is important because it will reveal the ‘danger cases’ where the borrower is receiving the benefit and the security provider is taking the risk.
If you suspect there might be undue influence or duress, advise the security provider not to enter into the transaction. If you still suspect either or both undue influence or duress and the client wishes to proceed, do not provide the certificate.
☑ Recommend to the client they obtain financial advice.
If appropriate, recommend your client seeks independent financial advice before signing the documents. If you think the client has unrealistic expectations of the outcome of the transaction, insist they obtain independent financial advice before proceeding. Make it clear you are not providing financial advice.
☑ Recommend to the client they obtain valuation advice.
Where the client is guaranteeing a loan for a borrower, recommend a valuation be obtained of the borrower’s assets or business if the money is being borrowed for the business.
☑ Never give a certificate for a pre-signed document.
This is false witnessing of a document. Unless you have witnessed the signing of the document you cannot certify as to execution by the client.
☑ Keep proper records of the advice you have given the client.
Open a file, make a file note and confirm your advice to the client in writing. If you obtain a written acknowledgment from the client of the explanation you have provided still keep a file note of what occurred at the meeting. We have claims where the client denies receiving the advice set out in the acknowledgement and a file note goes a long way to countering this.
It is important to remember that the advice you know you gave may later be denied or disputed. You can substantially protect yourself by keeping good written records of the conference you had with the client before signing the practitioner’s certificate.
With the improvement of audio and video technology consider recording the meeting with the client. We have seen a case where the production of such a tape expedited the release of the firm from an Amadio claim.
Files notes should include:
- the date of the meeting
- the author of the file note
- details of who was in the meeting
- the duration of the meeting
- the substance of your advice.
It is also important to remember that file notes are a note to the file, not to a note to you. LPLC has prepared a form of basic file note and a copy is contained in Appendix Five (the note pads are available for purchase on the LPLC website under Training). Appendix Six contains a file note that has been designed to be used by practitioners when they are advising third-party guarantors and providing a solicitor’s certificate of their advice.
☑ Ensure your advice is complete.
Explain to clients in the simplest language possible important issues such as:
- joint and several liability
- that the mortgagors or guarantors may lose their property first
- that the amount repayable can be more than the amount borrowed.
Clients need to understand the general nature and effect of the documents as well as what could happen in the worst-case scenario. At the end of your explanation ask your client what they understand the position to be. Recording their responses is one way of ascertaining the degree of their understanding. The client needs to articulate what they understand. It is not sufficient evidence of understanding for the client to just nod and say ‘yes, I understand’.
☑ Charge appropriate fees.
When providing a practitioner’s certificate, it is recommended you charge a fee which reflects the necessary work involved in properly advising on the documents.
The LIV practitioner’s certificate package
The introduction of the Legal Profession Uniform Legal Practice (Solicitors) Rules 2015 should mean that providing practitioner’s certificates other than the ones referred to in the conduct rules will no longer occur.
Rule 11.2 – verification of identity
Rule 11.2 sets out the requirement to undertake a verification of identity (VOI) of the borrower, third-party guarantor, surety mortgagor or indemnifier for the principal borrower. There quirements use the verification of identity standard contained in Schedule 8 to the Model Participation Rules determined by the Australian Registrars’ National Electronic Conveyancing Council as adopted and made by each jurisdiction pursuant to section 23 of the Electronic Conveyancing National Law.
LPLC has published a checklist and a number of other documents about undertaking a VOI. You can find these on our website here.
Schedule 8 contains the safe harbour provisions for doing a VOI. This is commonly known as a 100-point check. This means practitioners must comply with schedule 8 when undertaking a VOI when providing a solicitor’s certificate.
Rule 11.3 – The evidence of advice provided by a solicitor to a borrower must be in the form of:
11.3.1 Law Society of NSW Declaration by Borrower/Grantor of a Security Interest Schedule 1, 1A or 1B, or
11.3.2 Law Institute of Victoria Australian Legal Practitioner’s Certificate 1 (Schedule 1).
In Victoria in order to comply with rule 11 practitioners will only be entitled to provide the Law Society of NSW or LIV form of practitioner’s certificates. Refer to Appendix One to see the current LIV forms.
The most current versions of the certificates and the acknowledgement and interpreter’s certificate are also in Appendix One.
The LIV forms can be purchased from the LIV bookshop or online at www. liv.asn.au.
(The bookshop item codes are 3.1 – 3.4.)
The two forms of certificates issued by the LIV are designed to cover the following two categories of clients.
- Australian Legal Practitioner’s Certificate 1 – where the client is the direct borrower or is a security provider referred to in the documents as the borrower.
- Australian Legal Practitioner’s Certificate 2 – where the client is a third-party guarantor, surety mortgagor or indemnifier for the principal borrower.
The Law Society of NSW forms can be downloaded from its website at www.lawsociety.com.au/uniformlaw
There is no charge for using the Law Society of NSW forms and they are available to Victorian practitioners.
Trust opinion certificate
Rule 11 only covers advice given to borrowers, guarantors and mortgagors. It does not cover the trust opinion certificates that borrower’s practitioners are asked to sign as they involve giving an opinion to the financial institution.
A trust opinion certificate requires the practitioner to warrant that the trust documents given to them contained all the terms of the trust, that there was no conflict of interest which would preclude the trustee entering into the loan and that the loan was for the benefit of the trust. The practitioner should not warrant the certificate if all these are not true.
A typical type of certificate used by the major banks is in Appendix Four. LPLC’s comments are also included to assist practitioners when asked to provide this type of certificate.
LPLC has seen an increase in borrowing by self-managed superannuation funds based on the number of practitioner enquiries received.
Practitioners are often concerned about the wording of the certificates they provide to lenders as they often go beyond certification of advice given and become opinion letters. Providing advice on borrowing by SMSF is a growing area of risk for practitioners.
The certificate usually provides that the practitioner has reviewed certain documents including the loan documents, deed constituting the superannuation fund and bare trust deed. The practitioner is often required to certify that the superannuation fund has been validly constituted and complies with the Superannuation Industry (Supervision) Act 1993 (Cwlth) (SIS Act).
There is some argument that the effect of the wording of this type of certificate is that a practitioner is advising both the lender and borrower. This may give rise to a conflict.
A practitioner is usually not in a position to comment on whether the fund has been validly constituted and complies with the SIS Act. It is more appropriate that compliance matters be referred to the client’s auditor.
A practitioner is also unable to advise on matters beyond their control. For example, a certificate may require the practitioner to certify that on completion the bare trustee will be the registered proprietor of the real estate. The lender will have the control of the transfer of land following settlement and so should not require the practitioner to certify such a matter.
Other matters may be known only to the borrower and the borrower should provide any necessary certification relating to these matters. One example is the requirement to certify that the loan funds will be used to acquire the real estate.
The opinion required in many of these certificates should more properly be given by the financiers’ legal advisors.
The practitioner’s certificate package does not solve all the problems associated with Amadio claims. One of the reasons is that lenders tell their customers that their security documents need to be signed in front of a practitioner rather than they need to seek legal advice before signing the documents. The emphasis is often placed on obtaining the signature rather than obtaining the advice.
This incorrect approach primes clients to expect the process of obtaining a practitioner’s certificate is akin to having a passport application witnessed leading to them becoming dissatisfied by the procedures and costs involved.
In response to LPLC’s concerns, at the time the practitioner’s certificate package was launched ABA encouraged a branch-level education program about the legal service value of the certification process. In particular, the program included instructions that bank officers should:
- not advise customers to come back ‘in five minutes’ with a signed practitioner’s certificate
- explain to customers that it is the bank’s requirement that a practitioner’s certificate be obtained
- explain to customers that legal advice is required, not merely the witnessing of documents
- advise customers that the practitioner will need to consider the documents before providing legal advice and be entitled to charge a reasonable fee for the service.
The ABA has created a Code of Banking Practice which covers a wide variety of issues. In particular it prescribes the information banks should give to guarantors before they accept guarantees from them. This includes telling the guarantor they should obtain independent legal advice as well as giving them information about the credit facility that is to be guaranteed and the creditworthiness of the debtor. A copy of the Banking Code of Practice as well as a list of the banks that have agreed to comply with it is available on the ABA website.
New and/or inappropriate forms of certification
Some banks, financial institutions and franchisors have deviated from the practitioner’s certificate package both in form and substance. Some forms purport to certify matters other than explanations of mortgages or guarantees.
Certificates with misleading headings
In some cases a certificate headed ‘Certificate of witness/identification’ not only asked for certification that the signatory was one and the same person as that named in the mortgage but also asked for certification that the signatory had signed the mortgage of their own free will and with full understanding of the documents. This document was, by stealth, a practitioner’s certificate. Always read the document before signing it and do not rely only on the heading.
We have seen certificates where the borrower’s practitioner was asked to certify that the loan documentation was enforceable against the borrower. Another form of certificate stated that ‘the practitioner will warrant the warranties provided by the guarantor’. Neither of these certificates or warranties are appropriate for a practitioner to give when acting for the borrower or guarantor.
Certificates that are too broad
A certificate titled ‘Certificate of independent legal advice’ was forwarded to LPLC. It looked similar to the LIV ABA certificate but required the practitioner to certify broadly that the practitioner had ‘advised the borrower before any documents listed in the certificate were signed’. There was no further detail about what the advice covered.
The document also contained a statement that ‘This certificate cannot be relied upon unless it is in the exact form prescribed by the Law Society of NSW without alteration and
… is given by the holder of a current practicing certificate
…’. This gave the impression that the document had the imprimatur of the Law Society of NSW which it did not. Eventually the lender in question was persuaded to accept the LIV ABA form of practitioner’s certificate instead.
Certificates about financial advice
A certificate referred to us required an independent financial adviser to advise the client about the financial impact and effect of the loan. The loan capitalised the interest. Much of the certificate referred to financial advice and there were also aspects that appeared to require legal advice. When asked whether a practitioner was required to sign the document, the bank indicated that ‘many practitioners’ had signed such certificates. For this style of loan, the bank did not require a separate practitioner’s certificate. While it was clear that clients seeking to enter into these types of transactions required legal advice, it was equally clear that the type of certificate provided by the bank went beyond the realm of legal advice and was not one practitioners should sign.
We have seen many and varied practitioner’s certificates relating to the purchase of a franchise as there is no standard form. Practitioners should read these certificates carefully and not sign one that states the practitioner advised the franchisee and the guarantor unless they are the same person.
☑ Only use the form of certificate as specified in the Legal Profession Uniform Legal Practice (Solicitors) Rules 2015 when advising a borrower, a grantor of a security interest or a security provider.
☑ Never be complacent about the content and form of documents which lenders insist be signed and/or witnessed by you.
☑ Scrutinise what you are being asked to sign.
☑ Consider whether the certificate and/or declaration proffered is appropriate and reasonable.
☑ Ask yourself whether you can personally vouch for the contents of the certificate and/or declaration.
☑ Do not sign unless the matters contained in the certificate and/or declaration are within your knowledge and true.
Use of statutory declarations
Rather than seeking a certificate, a lender may request the practitioner witness a statutory declaration given by the security provider attesting to certain matters about the loan transaction. An example of this sort of certificate is contained in Appendix Four.
As similar allegations may be made where a practitioner acting for the security provider witnesses this form of statutory declaration as are made for practitioner’s certificates, use the same risk prevention strategies as listed above.
Unrepresented security providers
In these type of claims the practitioner believed they never acted for the security provider who was unrepresented, but only for the borrower (or in some cases, the lender). This is not the view of the security provider who argued that some kind of retainer existed or duty was owed and the practitioner failed to protect their interests. In those cases the security provider also alleged the practitioner had a conflict of interest.
Transactions involving security providers always require caution, especially where the parties are unrepresented. Often it is these parties who are inclined to argue that they would not have signed the document had they been properly advised.
We still see cases where a practitioner, sued by a security provider claiming a retainer existed or duty was owed, steadfastly maintains they were only acting on behalf of the borrower. However, the manner in which the practitioner conducted the matter can sometimes be open to contrary interpretation. It is easy for an unrepresented security provider to interpret contact from any practitioner as being the practitioner acting for them.
Practitioners must ensure their conduct does not encourage a security provider to believe the practitioner is acting for them. Under the terms of their LPLC professional indemnity insurance policy, practitioners will incur a deterrent excess if they acted for more than one party to a transaction or breached any professional conduct rules.
☑ When acting for a borrower in a transaction with an unrepresented security provider, implement the following actions.
- Write to the security provider direct, enclose the necessary documents, confirm you are not acting for the security provider and that the security provider will need to obtain independent legal advice. Ask the security provider to return a signed duplicate copy of your letter confirming receipt.
- Do not answer requisitions on behalf of a security provider under the misapprehension that you are helping to progress the transaction on behalf of the borrower. This can blur the distinction between whom you are and are not acting for. Send the requisitions to the security provider.
- Never use the borrower as an intermediary in any other capacity to reach the security provider. The borrower has a vested interest in the transaction and has no legitimate role as an agent.
- Ensure the disbursement order is signed by the security provider if the funds are to be disbursed to the borrower, that the bill is addressed to the borrower – not the security provider and that your file properly reflects who your client is.
- Be clear in your correspondence with the lender’s practitioner that you are acting on behalf of the borrower and not the security provider. You should write ‘We act on behalf of the borrower’ not ‘We act in the above matter’.
☑ When acting for the lender in a transaction with an unrepresented security provider, implement the following actions.
- Do not leave the borrower responsible to advise or obtain the security provider’s signature. It could later be argued that the borrower was an agent for the lender who was a party to the unconscionable conduct, so the mortgage should be set aside.
- Write directly to the security provider making it clear you are only acting for the lender.
In some Amadio claims where practitioners gave advice to third party guarantors, it was later alleged the practitioners either acted for the borrower in the same transaction or had acted for the borrower in other transactions and therefore had a conflict of interest.
The courts subjectively weigh each case on its merits to determine if the advice given by the practitioner was adequate to alert the guarantor to any relevant risks.
Conflict will be just one of the issues to be looked at. The possible existence of a conflict seems to make the chance of a claim more likely, even if the practitioner is ultimately not liable. A practitioner acting in conflict is more likely to be seen by a court to owe a higher duty of care to all parties given their fiduciary obligations.
Conflict can also occur when acting for co-guarantors where the co-guarantors have different interests. These include husband and wife directors, business partner directors, and husband and wife where one is director but the other doesn’t work in the business.
Acting for the business and the company
In one claim, the practitioner initially acted for an individual (original client) in the purchase of a business. A company was nominated as the purchasing entity. Another party was appointed as the sole director of the corporate purchaser and was also the sole shareholder. The original client believed the shares were held on trust for him and his spouse.
The company obtained finance to fund the bulk of the purchase price for the business. The security for the loan included personal guarantees and mortgages over land owned by the spouse.
The original client and his spouse, along with the sole director and his spouse, attended the practitioner’s office to sign of the security documents. The practitioner was concerned with the lack of independence in providing the guarantors with a practitioner’s certificate but proceeded to do so after approval from the lender.
Years later the corporate borrower defaulted on the loan and the lender called on the guarantees. The guarantors denied the validity of the guarantees and alleged the practitioner was liable for their loss on the basis that the practitioner had a conflict and did not properly advise them about the guarantees. The matter eventually settled with the practitioner paying a considerable sum to the lender.
☑ Avoid actions or procedures that could result in an allegation of conflict being made.
- At the beginning of a matter determine which party you are acting for and open your file in the name of that party.
- Ensure you notify anyone who might believe you are acting for them that you do not act for them and that they should seek their own independent advice.
- Do not act for more than one client where their interests are not the same.
- When acting for a borrower, mortgagor, and/or guarantor inform the lender you are not acting as their agent when providing the lender with any information.
- Do not allow any third party to attend meetings or be involved in dialogue with your client.
Many recent cases have considered whether practitioners should have advised their clients against proceeding with various loans because the intended investment was unwise or unsafe.
The case of Riz
In 2009, the New South Wales Court of Appeal decision of Dominic v Riz  NSWCA 216 softened the obligations on practitioners to advise clients about self-evidently absurd or improvident transactions.
The case concerned Mr and Mrs Riz, who intended refinancing their home to invest in a high-risk scheme and expected to receive a return on the investment that was described at first instances as ‘absurd’. The trial judge held that although the retainer was to advise and act on the loan and mortgage transaction, the duty of care extended beyond the limits of the retainer where the subsequent transaction was so improvident and risky. The trial judge found the practitioner liable but the Court of Appeal reversed this decision.
Riz on appeal
The Court of Appeal in Riz said the trial judge had gone too far in finding that practitioners explaining loan and mortgage documents are obliged to address the fairness and reasonableness of the underlying transaction. The court noted that the circumstances in which practitioners have a responsibility to act outside the retainer are ‘less than clear’. It acknowledged that if a practitioner sees something outside the retainer that could adversely affect the client they may be obliged to inform the client about it.
The Court of Appeal found that the practitioner had given the clients clear advice that they needed to obtain independent legal and accounting advice about the investment. The practitioner knew nothing about the investment other than that the expected return was very high. The clients were found to be aware of the risks involved.
Prior to the appeal being decided, other decisions explored the scope of the duty of care and whether it may extend beyond the scope of the retainer to include advice on the commercial wisdom of entering a transaction1. The courts have not been inclined to impose a duty in circumstances where the practitioner did not assume responsibility to the client or there was no reliance by the client.
Since Dominic v Riz the Court of Appeal in NSW has further commented on the duty of practitioners in Provident Capital Ltd v Papa  NSWCA 36. The practitioner was giving Mrs Papa advice relating to borrowing money which she was then giving to her son for his business. The court found the practitioner should have brought to the attention of Mrs Papa in strong terms the obvious practical implications of her entry into the transaction and he failed to do so.
It is good risk management in mortgage and loan transactions to specify:
- the scope of your retainer
- that you are not giving financial advice
- that the client should obtain their own financial advice.
This may not provide complete protection in the event the client enters into a blatantly improvident transaction. The Victorian Supreme Court in Spiteri v Roccisano  VSC 132-22 VR 596 acknowledged that ‘in some cases there may be no bright line of distinction between legal and commercial advice where a practitioner is acting for a client in a commercial transaction’. There is often a blurry line between what is financial and what is legal advice.
While it may be tempting not to ask about the client’s arrangements, there is a risk that a court may say you should have known, been suspicious or made further enquiries. To avoid that risk be proactive − you need to know enough about what the client is doing to determine if the matter is clearly improvident, absurd or ‘too good to be true’.
Ask your client questions such as:
- why are they entering into this transaction?
- what are they planning to do with the money they are borrowing and what do they hope to gain?
- if they are investing the money, what sort of investment is it and is it a managed investment scheme?
- if it is not a managed investment scheme, does the client know what safeguards there are, what security is offered and what that security is worth?
If it is clear the client needs to get independent financial advice, forcefully recommend that to the client and give them the opportunity to obtain that advice before proceeding.
If your client elects not to obtain independent financial advice consider having them sign an acknowledgement that:
- they were advised to do so
- they declined to do so for the following reasons – (set out what the client tells you about their reasons)
- they are acting contrary to your recommendations in that regard.
In claims involving mortgage fraud, sometimes the fraud is committed by a family member on elderly parents or a spouse.
While the practitioner is not usually involved in the fraud, their failure to detect tell-tale signs and properly manage the advice and certification for the loans often facilitates the fraud.
Here is a shortlist of many mortgage fraud claims’ signature features. If any of these are present, take extra measures to ensure the borrowing is bona fide.
Signature features of mortgage fraud
- It’s a family affair:
- adult child defrauds elderly parents or
- one spouse against another.
- Lost or missing duplicate certificate of title.
- Excuses concerning the unseen borrower.
- No photo identification produced by the borrower.
- Certification is being provided to a new client.
- Settlement money is going to a third party.
- Errors and omissions in the details including:
- spelling mistakes in names or use of anglicised names different to the names on identity documents
- omissions or incomplete details
- inconsistencies in forms of signature.
- High risk lender and unencumbered title.
- A third party is actively involved such as:
- a non-borrower providing instructions or
- a broker.
☑ Ask for identification and record the evidence produced.
- Fraud is increasingly common and title deeds can fall into the wrong hands. We have seen cases where the person introduced as the borrower’s nearest and dearest is actually the borrower’s partner in crime. Asking for identification need not be embarrassing or offensive−it is just a sound principle of doing business.
- The identification should be provided before any loan documents are witnessed by the practitioner and a copy of the identification kept.
- If in doubt as to the identity of a client, inform the client you are unable to witness the signing of the documents. It may be that the client is able to provide further evidence of their identity which will be satisfactory.
Negligent certifications by practitioners can have the unfortunate effect of facilitating a fraud.
Practitioner pressured into signing certificate with no ID sited
A practitioner was an acquaintance of a young woman who rushed into his office requesting a practitioner’s certificate for her parents. The settlement was scheduled the next day and she told him that a conveyancing company was acting for them. The practitioner explained the parents would need to attend the office. Later that day, she returned, pleading with the practitioner and explaining that it was a financial emergency for her parents. Her mother was very sick and downstairs in the car. The practitioner attended the parents briefly in the car, verifying the mother’s identity by a copy of her driver’s licence but the father produced no photo ID. The certificate signed by the practitioner contained no photo identification of the father.
In fact, the man in the car had been posing as the woman’s father. When a claim surfaced, it appeared that the mother and daughter had colluded in the fraud.
For another example of fraud see XPAK Pty Ltd v Scibilia & Ors  VCC 1260.
☑ When acting for borrowers:
- talk to each borrower directly and separately
- do not take instructions from third parties
- carefully read the mortgage and loan documents
- use the LIV ABA approved form of certificate (referred to in Amadio claims on page 5 and the LPLC Checklist – Advice on equity release products on page 36)
- insist on photo identification and make photocopies for your records
- never provide a practitioner’s certificate for pre-signed documents
- ensure you have a signed authority from all borrowers where money is payable to third parties
- keep proper records of your advice.
Missing certificate of title
Mortgage fraud is becoming more sophisticated. In one case the perpetrator even took the trouble to forge a practitioner’s signature on a certificate. Lenders’ practitioners need to be alert to this possibility, particularly where suspicions are already raised. A lender’s practitioner may be exposed to liability by relying on a flawed certificate or advising a client to proceed in the absence of a title.
A practitioner was acting for the lender and a conveyancing company was acting for the elderly borrowers who were mortgaging the family home. The lender’s practitioner was concerned that the certificate of title was missing but the conveyancing company assured him an application for a replacement was in progress. The lender was keen to proceed and said he would be satisfied with an undertaking about the replacement certificate of title. The lender’s practitioner posted the paperwork directly to the borrowers.
In fact, the daughter of the borrowers had engineered the entire transaction without her parents’ knowledge. The title was not missing and the daughter pretended that an application for a replacement had been made. She had been providing the conveyancing company with the day-to-day instructions, had intercepted mail from the lender’s practitioner addressed to her parents and produced forged practitioner’s certificates.
The practitioner for the lender received the practitioner’s certificates, but did not scrutinise the certificates closely which would have alerted him to the possibility that the certificates were forged.
☑ When acting for lenders:
- ensure compliance with the identification requirements relating to mortgagors as specified in section 87A of the Transfer of Land Act 1958 (Vic)
- confirm with the lender in writing that you are not providing any advice on the financial wisdom of entering the transaction
- instruct the lender to make its own enquiries about the borrower’s credit history and capacity to repay
- carefully read the signed practitioner’s certificate and check that:
- the details and names are complete and consistent with other transactional documents
- photo identification was provided
- if you do not know the certifying practitioner, confirm their existence on the Victorian Legal Services Board + Commissioner’s website at www.lsb.vic.gov.au
- if any features of mortgage fraud appear from page 24 of this guide, make the extra enquiries necessary to satisfy yourself it is a bona fide borrowing
- where a lost title application is being processed, do not settle until a new title has been issued.
No or inadequate security
Claims in this category occur when practitioners are acting for lenders of all sizes − lending institutions, private lenders and smaller and second or third tier financiers. For 2016/17 75 per cent have involved practitioners acting for private lenders.
No or inadequate security mistakes occur because a firm:
- fails to register the mortgage where the practitioner:
- simply forgot to register the mortgage
- delayed in registering the mortgage allowing a third-party caveat to be lodged after settlement
- failed to conduct a check search just prior to settlement and so failed to discover that a third-party caveat had been lodged
- failed to obtain consent of any prior registered mortgagee
- lost the mortgage or it was stolen
- failed to detect that the property comprised more than one title and the mortgage was only registered over one of the titles
- was mentally unwell and there was no one there to pick up the mistakes
- fails to realise that the borrower was a half owner or not the owner of the property they were purporting to mortgage
- fails to advise the lender about obtaining security, often because the firm fails to clarify the limits of their retainer and thinks they are just documenting the deal and not advising the client on the deal
- fails to advise the lender about the unusual nature of the security property, such as:
- unusual terms in a lease
- planning schemes
- encumbrances on title
- fails to obtain items such as a copy of the certificate of insurance showing the mortgagee’s interest from the owner before settlement
- acts for both sides and doesn’t protect one client by checking what they otherwise would if only acting for one party.
With the advent of electronic transactions many of the ‘failure to register’ claims may become a thing of the past but there are still other mistakes of significance that can catch practitioners out.
Many of these claims occur where practitioners act for private lenders who they know well and so they take an informal approach. It is assumed the lender knows and understands the risk they are taking in the transaction so no clear advice, especially written advice, is given.
Failing to secure loan for parents
A practitioner was retained by parents to document a loan to their son of $200,000 to pay the balance of the purchase price of a house.
The son was purchasing the house with his partner and they were registered on title as joint proprietors.
The loan agreement was between the parents and the son and not with the partner, and provided that:
‘…….In consideration of the Lender lending the Borrower the said sum of Two hundred thousand dollars [$200,000] the Borrower gives the Lender a Charge over the Property…..’
‘……The Lender shall be entitled to register a Caveat over the Property securing its Charge……’
A caveat was lodged by the practitioner.
About 12 months after the loan agreement was entered into sadly the son passed away.
The son had no other assets of any real value at the date of his death as his partner by survivorship, became the sole registered proprietor of the house.
The parents brought a claim against the practitioner alleging the practitioner failed to protect their interests as no advice was given to them about registering a mortgage, obtaining security from the son’s partner, and/or the effect of the joint tenancy in the event of the death of the son.
The claim ultimately settled with a substantial payment to the parents.
Can you find me a lender?
Not long before settlement of a $2.2M property the purchaser asked his practitioner if he knew of anyone who would lend him some money for the purchase.
The practitioner referred the purchaser client to his longstanding private lender clients (husband and wife)
The lenders and the purchaser agreed that the loan would be $300,000 for three months at 24 per cent interest. The security would be second mortgages over the purchase property and another property owned by the purchaser.
The practitioner agreed to act for the lenders in relation to the loan and his purchaser client for the purchase. The purchaser told the practitioner he did not want to provide a second mortgage over the other property, as he was going to subdivide it.
The practitioner went back to one of the lenders and told him about the mortgage. The practitioner said that he advised the lender client of the risks of just taking a second mortgage over the one property. He said even with a priority agreement with the first mortgagee, it would only limit the capital and not the interest and costs, and there would be a risk.
The loan went ahead and at the end of the three-month term it was extended by another three months with an extra $100,000 on the basis that the interest due was paid. An equitable charge was provided with the right to lodge a caveat. The lender indicated he didn’t need to have the caveat lodged at the time of the loan.
Ultimately the loan was not repaid and the lender brought proceedings to recover the debt.
The lender clients alleged that the practitioner had:
- made representations about the borrower that induced them to make the loan
- not provided any explanation of the loan documents
- not told the clients to obtain any independent financial advice, seek details of the borrower’s assets or how the borrower would repay the debt
- not taken any steps to follow up the second amount of interest that was supposed to be paid after six months until about three weeks after it was due
- not told the clients about the borrower’s financial problems overseas
- lead the clients to believe further mortgage security would be provided for the extra $100,000 loan
- not told the clients that they would not be able to act if recovery proceedings were required.
The practitioner said he did give the lender client husband advice about the adequacy of second mortgage security. There was no file note of that advice and no letter confirming it. There was also no advice given to the wife.
Less than half the debt was recovered after the property was sold.
Just document the deal – for both!
A practitioner was originally retained by a borrower developer company to document a deal it had done to borrow $3.4M. The lender was a company which was controlled by one man. It was agreed early on in the practitioner’s retainer that he would also act for the lender in this transaction – after all everyone was in heated agreement!
The loan agreement was signed in September and a mortgage was registered the following February.
The borrower had financial difficulties and the loan was restructured twice with increases in borrowings and substituting a second mortgage for a first mortgage with repayment of $1.5M. A further deed was entered. The borrower still struggled to meet its obligations and 18 months later the lender lodged caveats over various lots claiming rights under a mortgage, insisting that the loan agreement was no longer in force and requiring repayment of the money.
The borrowers brought proceedings to compel the lender to remove the caveats. The lender joined the practitioner as a third party, alleging the practitioner should have advised against entering into the amended loan agreement as it was against his interest to agree to it. It is also alleged that the lender’s director was under a special disability because of:
- his age
- his emotional attachment to each of the directors of the borrower
- his recent divorce
- his emotional vulnerability
- his financial need as a result of divorce
- poor health
- status as an adult migrant who learnt English as an adult
- limited ability to understand complex legal documents
- reliance on his practitioner.
The practitioner had acted for both parties and while he thought he was only retained to ‘document the deal’ it should have become clear to him when the original deal could not be complied with that he needed to be concerned about conflict and the need for the clients to receive advice about their options.
Lease terms do matter
The firm acted for a commercial financier in documenting a $6.7M loan and a further advance two months later of $700,000. The security looked good. There were first mortgages over three properties in country Victoria and guarantees from the borrower’s directors. However when there was a default on the loan, the directors were bankrupt and the properties were sold for $2.5M less that the outstanding loan amount.
It was alleged the practitioner had certified that the lease of one of the properties was in order, valid and subsisting, when in fact there were several problems with the lease. The rental on renewal would be reduced significantly to $100,000 (plus GST plus outgoings) or five per cent of turnover. There was also a clause that effectively meant the $100,000 would not increase over three years which was not brought to the financier’s attention. It was clear from the extract of valuation the practitioner had been sent that the valuer had not taken this drop-in rent into account.
Our panel solicitor felt this fell squarely within the comments made by Brereton J in Kayteal Pt Ltd v Dignan & Ors  NSWSC 197 where he said:
A solicitor is bound to report to the client matters discovered, or that ought to have discovered, in the course of investigating title and preparing for completion, that a reasonably competent solicitor would regard as such as might cause the lender to doubt the correctness of the valuation, or some other ingredient of the lending decision. 
It also transpired that there was a second lease that had no minimum rent amount after renewal.
The matter settled with contribution from LPLC as well as from several of the other parties including:
- the valuer
- the managing real estate agent of the property with the problem leases
- the borrowers and their directors.
☑ Always lodge a caveat in the event that registration may be delayed.
☑ Always do a final search as close to the settlement time as possible to check for any dealings which may delay or prevent registration of the mortgage. Do not settle until any impediments are removed.
☑ Where the security is a second registered mortgage, make sure the first mortgagee has agreed to the second mortgage and to limit its priority. This is usually done by a deed of priority. Also ensure the first mortgagee has taken the necessary action to ensure the second mortgage can be registered, for example providing a nomination form to Land Victoria and making the title available to enable registration of the second registered mortgage.
☑ Have a practice management system in place to ensure mortgages are registered promptly.
☑ When acting for private lender clients you need to have good precedents and systems, and ensure you advise your clients both orally and in writing of the effect of the documents.
☑ Avoid informality even with longstanding clients
☑ Be alert to possible conflicts, especially if you are asked to ‘just document the deal’ for both parties
☑ Review the documents you will be advising on to ensure you are fully informed on their content.
☑ Treat related party loan transactions like any other loan on commercial terms and ensure they are properly documented.
Advice on equity release products
The two major equity release products commercially available in Australia today are reverse mortgages and home reversion schemes. These products pose a range of complex issues and risks for practitioners.
Some important variables to consider in assessing the effect of an equity release transaction are:
- the loan amount
- rate of interest
- the borrower’s life expectancy.
Typically, these products involve no repayments and capitalised interest. Equity is eroded very quickly and they are more expensive than traditional forms of borrowing. There is an inevitable measure of uncertainty about the size of the ultimate debt.
As with other forms of mortgage, lenders require borrowers to obtain independent legal advice about the transaction before proceeding. In turn, practitioners may be asked to certify that the borrower has received independent advice about the nature and effect of the transaction.
Before you advise and certify
The client should discuss product alternatives with an independent financial advisor and choose one on the strength of financial advice (including Centrelink and tax issues) before the practitioner provides legal advice. There are no ‘standard’ products or conditions, so before dispensing legal advice spend time reading the fine print. The practitioner needs to understand the mechanics of the transaction including when the title changes hands, what security the borrower has and particularly, the range of default provisions.
Why equity release?
Understand the context of the proposed borrowing. Remember that equity release products are a more expensive form of finance than conventional loans. They should be understood as a choice of last resort.
Explain the nature and effect of the transaction as well as its risks clearly to the client and document that advice. Record why the client wants to use this product and what they understand of the transaction and the risks. Some situations might require the practitioner to take extra precautions, for example where the borrowing is for the benefit of a third party or intended as a gift.
Act very cautiously where the client appears vulnerable to the influence of another party, the documents are being signed under a power of attorney, English is not the client’s first language or there is undue haste to complete the transaction. If the practitioner considers the client is acting under duress decline to act.
Charge an appropriate fee for the advice. Providing the certification for a borrower is more than simply witnessing a document. The process will take time and judgment. Be clear that the advice being provided is legal and not financial advice.
Use an appropriate form of certificate, preferably an LIV ABA-approved form in the LPLC Checklist: Advice on equity release products page 36.
LPLC Checklist: Advice on equity release products
While the following checklist is not exhaustive, it is designed to prompt you to consider the many dimensions of these transactions.
The checklist may be photocopied for ongoing use.
Explore with the client:
☐ Did the client obtain financial advice before seeing you? If not, recommend the client seeks financial advice first.
☐ Have other alternatives been considered?
☐ What is the money for?
☐ Who is the money intended to benefit?
☐ Are family members or heirs aware of the proposed borrowing?
☐ Does anyone live at the property who is not on title but whose rights might be adversely affected by the transaction?
☐ How long does the client envisage remaining in the family home?
☐ Are there any health issues likely to affect the client’s plan to remain at home?
☐ If the client intends to retire to a nursing home or facility where an aged care accommodation bond is required, will there be sufficient equity left to achieve this?
☐ Does the client currently receive any Centrelink or Department of Veterans Affairs’ entitlements which might be affected by receipt of a lump sum or annuity?
☐ Is there more than one borrower?
If so, see them.
The effect of the transaction
Explain to the client:
☐ When title passes to the lender.
☐ The basic rights and obligations of the client.
☐ Whether there is a ‘no negative equity’ guarantee (and recommend that the client finds a product with such a guarantee).
☐ If the product creates a life tenancy, the need to protect this by a caveat over the property.
☐ Where the client loses legal title to the property, the need to protect the client’s interest by a caveat over the property.
☐ The general nature and effect of the mortgage securing the loan.
☐ The circumstances when repayment would be required.
☐ The client’s various obligations to ensure a default is not triggered.
☐ The upfront costs and interest payable. (If the product is a reverse mortgage, give the client the compound interest payable for five, 10 and 15 years.)
☐ What protections there are to remain in the home.
☐ The consequences if the property is vacated for any length of time.
☐ In what circumstances the property can be sold.
☐ When the loan is repayable.
☐ How the agreement assigns rights and obligations regarding maintenance and insurance including:
- who is responsible for payment of building insurance, rates and taxes
- any requirement to maintain upkeep of the property in order to avoid triggering default provisions
- details of any powers conferred on the lender to order repairs.
☐ What constitutes a default and the consequences including default provisions that nullify the ‘no negative equity’ guarantee.
Issues of duress
☐ Is the money for a third party?
☐ Are there any indications of pressure from other parties or family members?
☐ Is the client mentally or physically infirm?
☐ Does the client have decision-making capacity?
☐ Is the client dependant on family members to look after their financial affairs?
☐ Are any documents being signed pursuant to a power of attorney?
☐ Are there communication difficulties because the client’s first language is not English?
☐ Is there family division, particularly between the client’s adult children?
☐ Is the client in an inexplicable rush to complete the transaction?
☐ Make comprehensive file notes of the client’s instructions and your advice, including the reasoning process, your client’s response and duration of the meeting.
☐ Confirm your advice to the client in writing.
☐ Use the LIV ABA approved form of certificate.
☐ Charge an appropriate fee.
☐ Keep your file.
LPLC Amadio Checklist
While the following checklist is not exhaustive, it does draw attention to the key areas that many practitioners overlook in Amadio transactions.
The checklist may be photocopied for ongoing use.
☐ Allocate only one person in the office to give practitioner’s certificates.
☐ Confine the provision of a practitioner’s certificate to existing clients.
☐ Where the client receives the security documents before you, request they send you the documents well in advance of your meeting to give you sufficient time to read them.
☐ Where you receive the security documents before the client, provide a copy of the documents to the client prior to signing to give them sufficient time to read them.
☐ If there is more than one client, consider whether their interests are the same. Does one need to obtain independent advice or will advising them separately be sufficient?
☐ Never act for both the borrower and a third party security provider.
☐ Always advise the security provider client without the borrower present.
☐ At the start of the first meeting insist on identification and do not proceed unless it is produced. Keep copies of the identification documentation.
☐ Use an independent interpreter when appropriate. Never use the person who is seeking to gain from the provision of the security as interpreter.
☐ Advise the client about the key elements of the documents and the worst case scenario.
☐ Ask the client to tell you what they understood your explanation to mean and record their response.
☐ Address the possibility of capacity, undue influence or duress.
☐ Ask your borrower client why they are borrowing the money.
☐ Ask your security provider client why they are entering into the transaction and record the answer.
☐ Do not provide financial advice.
☐ Advise your borrower client of the interest rates applicable to the transaction. Advise them in strong terms to obtain independent financial advice about the loan and the investment for which they are borrowing the money. Refer your client to a qualified accountant or financial adviser and ensure they have enough time to obtain this advice
☐ Advise your security provider client in strong terms they should obtain independent financial advice about the ability of the borrower to repay the loan. Refer your client to a qualified accountant or financial adviser. Ensure they have enough time to obtain this advice.
☐ Make a comprehensive file note of all attendances on your client, whether in your office or elsewhere.
☐ Check your file notes:
- are dated
- identify the author
- record the duration of the attendance
- record who was present or on the telephone
- are legible to you and someone else
- record the substance of the advice given and the client’s response/instructions
- are a note to the file rather than a note to you.
☐ Use the LIV/ABA practitioner’s certificate even if the financier has provided a different form of certificate.
☐ Confirm your advice in writing and seek a signed acknowledgment from the client.
☐ Keep files indefinitely.
Unrepresented surety mortgagors or guarantors
☐ Advise any security providers in writing that you are not acting for them and they should seek independent legal advice.
☐ Do not prepare answers to requisitions on the security provider’s behalf.
☐ Never use the borrower as an agent to reach the security provider.
☐ Ensure the security provider signs the disbursement order and you bill the borrower direct.
Be clear about who you are acting for in your correspondence with the other side.
- LIV legal practitioner’s certificates 1
- LIV legal practitioner’s certificates 2
- LIV certificate by translator / interpreter
- LIV form of acknowledgment given by borrower or surety
The LIV forms can be purchased from the LIV bookshop or online at www. liv.asn.au.
LIV practice note on practitioner’s certification procedures
The purpose of this practice note
This practice note is published by the Law Institute of Victoria. Its purpose is to state the procedures recommended to be followed by a practitioner when engaged to certify an explanation given to a person of the general nature and effect of a loan or security document (including a guarantee) proposed to be signed by that person.
This practice note does not apply to a certificate or opinion given by a practitioner for any other reason in connection with a loan or security document.
Application of the recommended procedures
This practice note is to be followed when the person signing is an individual and is:
- the direct borrower from a lender or a security provider referred to as a borrower in the document to be signed or
- a third-party guarantor, surety mortgagor or indemnifier for the principal borrower.
This practice note applies regardless of whether the relevant transaction is for personal or commercial purposes.
A certificate not in accordance with this practice note may not be accepted by the lender.
Independence of the certifying practitioner
The certifying practitioner must be independent of the lender in all instances of certification.
Where certification is being given for a third-party guarantor, surety mortgagor or indemnifier the certifying practitioner must be independent of both the lender and of the principal borrower in the subject transaction.
Contents of the certificate
The certificate provided by a practitioner for a borrower or for a security provider referred to in the lender’s documents as a borrower shall be in the form of Schedule 1.
The certificate provided by a practitioner for a third-party guarantor, surety mortgagor or indemnifier on behalf of a principal borrower shall be in the form of Schedule 2.
Each part of the certificate in Schedules 1 and 2 (as the case may be) shall be fully completed by the practitioner to the extent relevant to the transaction and before the interview is concluded. In particular, the practitioner shall:
- record the name and address of the client
- record the details of each document with which the practitioner is provided (title and date of document)
- give the explanation referred to in Part B of the certificate
- give the information referred to in Part C of the certificate
- be satisfied that the client freely makes the statement referred to in Part D of the certificate and appears to have the understanding referred to. If it appears to the practitioner the client does not have that understanding the certificate must not be signed by the practitioner
- include in Part E details of the evidence of identification produced by the client
- where an interpreter is present at an interview with the client, include the name of the interpreter in the certificate and ensure the interpreter completes a certificate in the form of Schedule 3 before the interview is concluded
- hand the client a copy of the completed certificate, ensure the client reads it and have the client sign the certificate.
Acknowledgment by the client
The Law Institute further recommends that a certifying practitioner should ensure an acknowledgment is signed by the client for retention on the practitioner’s file. While the client will sign the foot of the certificate it is recommended that the practitioner’s file retain an acknowledgment of those matters and any other relevant matters discussed with the client as are detailed in the form in Schedule 4.
Rule 8.6 – Professional Conduct and Practice Rules 2005 (Vic)
A practitioner must not act for a guarantor in connection with the loan of money or the provision of finance or an agreement to lend money or provide finance where the practitioner is also acting in the same transaction for the borrower or the financier. Rule 8.6 does not prohibit the practitioner acting for a borrower and a guarantor if in the same transaction the guarantor is:
- a borrower
- a director of a borrower
- a shareholder of a borrower
- a beneficiary in a trust of which the borrower is the trustee
- a party holding a beneficial interest in the borrower
- a body corporate related to a borrower within the meaning of the Corporations Act 2001 (Cwlth)
- a director of such a related body corporate
- a shareholder of such a related body corporate or
- a party holding a beneficial interest in such a related body corporate, nor does rule 8.6 prohibit the practitioner acting for both the financier and the guarantor in the same transaction if they are related bodies corporate within the meaning of the Corporations Act 2001 (Cwlth).
For the purpose of rule 8.6 “guarantor” includes indemnifier, surety or a person or company providing security for a loan or finance.
11.1 A solicitor and a law practice must avoid conflicts between the duties owed to two or more current clients, except where permitted by this Rule.
11.2 If a solicitor or a law practice seeks to act for two or more clients in the same or related matters where the clients’ interests are adverse and there is a conflict or potential conflict of the duties to act in the best interests of each client, the solicitor or law practice must not act, except where permitted by Rule 11.3.
11.3 Where a solicitor or law practice seeks to act in the circumstances specified in Rule 11.2, the solicitor or law practice may, subject always to each solicitor discharging their duty to act in the best interests of their client, only act if each client:
11.3.1 is aware that the solicitor or law practice is also acting for another client; and
11.3.2 has given informed consent to the solicitor or law practice so acting.
11.4 In addition to the requirements of Rule 11.3, where a solicitor or law practice is in possession of information which is confidential to a client (the first client) which might reasonably be concluded to be material to another client’s current matter and detrimental to the interests of the first client if disclosed, there is a conflict of duties and the solicitor and the solicitor’s law practice must not act for the other client, except as follows:
11.4.1 a solicitor may act where there is a conflict of duties arising from the possession of confidential information, where each client has given informed consent to the solicitor acting for another client; and
11.4.2 a law practice (and the solicitors concerned) may act where there is a conflict of duties arising from the possession of confidential information where an effective information barrier has been established.
11.5 If a solicitor or a law practice acts for more than one client in a matter and, during the course of the conduct of that matter, an actual conflict arises between the duties owed to two or more of those clients, the solicitor or law practice may only continue to act for one of the clients (or a group of clients between whom there is no conflict) provided the duty of confidentiality to other client(s) is not put at risk and the parties have given informed consent.
Form of practitioner certificate for trust requested by lender
LPLC general comments
The certificate in this Appendix Four contains clauses which are commonly found in certificates or opinion letters requested by lenders where the borrower is acting in the capacity as trustee of a trust.
LPLC recommends that opinion letters or certificates of this kind should not be signed by the borrower’s practitioner. The information required in these documents is information the financial institutions should be satisfying themselves and not requiring borrower’s practitioners to certify.
If practitioners decide to give the certificate or opinion they need to understand that there is considerable work required to satisfy themselves about the issues raised and there are some matters that just should not and cannot be answered.
LPLC’s comments have been inserted in the certificate as a guide to the matters which need to be considered.
Before a practitioner can provide any certificate to a lender they need to:
- obtain sufficient information and instructions from the client including the original trust deed and any variations
- explain the certificate to the client and also explain any concerns relating to the certificate and seek the client’s instructions to request that the lender amend its certificate as required by the practitioner.
Part A – Trust Particulars
Name and Address of Trustee(s):
Name of Trust:
Type of Trust:
Names and Addresses of appointor(s) and guardian(s):
Names of Settlors and Settlement Date of the Trust:
Date and description of Trust Deed constituting the Trust (including variations, deeds of retirement and appointment) (“Trust Deed”):
Part B – Legal Representative Declaration
To: # (“Bank”)
being a duly qualified legal practitioner have acted as legal representative of the Trustee(s), upon whose instructions I have provided this certificate.
Specify in the certificate what your role is and be specific. For example, you act for the trustee in relation to the refinance of a loan.
I am of the opinion that:
a. under the Trust Deed, the Trustees(s) has/have the following powers.
- To borrow or raise money or otherwise obtain financial accommodation.
- To secure, by mortgage or charge over the assets of the Trust, the due performance by the Trustee/s of any contract, agreement or obligation.
- To guarantee, indemnify or guarantee and indemnify or secure, by mortgage or charge over the assets of the Trust, the due performance of any contract, agreement or obligation of any other person.
- To carry on any business.
- To open any account with a bank or financial institution with full power to operate on the account.
- To exercise any of its powers under the Trust Deed either alone or jointly with another or others.
- To enter into a transaction despite any personal interest the Trustee(s) or their officers, (if a company) may have in the transaction.
You need to make sure the trust deed contains the precise wording as specified above as near enough will not be good enough. This is a matter of checking the terms of the trust deed.
If the wording in the trust deed is not exactly the same as this certificate raise this issue with the lender and determine whether you can amend the certificate to reflect the wording in the deed.
Where the lender will not agree to amend the certificate or the trustee does not have any of the powers specified then a deed of variation will be required. Raise this issue with the lender as some lenders have their own form of deed of variation of trust deed to ensure the trust has the correct clauses.
b. the Trust is properly constituted under the Trust Deed;
This is a matter within the knowledge of the trustee and / or settlor and/or any practitioner who set up the trust.
Where the practitioner giving the certificate did not establish the trust then the certifying practitioner should tell the lender that it should be deleted and the lender should be told to seek a warranty from the trustee in this regard.
c. each of the Trust Particulars set out in Part A above are true, correct and up to date in all respects;
This is a matter of checking the particulars in the trust and comparing to part A. Any discrepancies may need to be dealt with via a deed of variation.
It is also important to verify the information with the client.
d. the Trustee(s) is/are entitled, by the terms of the Trust Deed, to be indemnified from the Trust assets (other than assets representing distributions or other amounts to which the beneficiaries of the Trust have become absolutely entitled in accordance with the Trust Deed) in respect of obligations incurred by the Trustee(s) under any transaction or document entered with the Bank from time to time (“Transactions”);
As mentioned above you need to make sure the trust deed contains this precise wording and amend the certificate and/or deed as necessary.
e. the Trust Deed has been validly executed by each party to that document;
This is a matter within the knowledge of the parties who executed the deed. The lender should be told to seek a warranty from the parties who executed the deed.
f. all necessary State stamp duties or similar documentary taxes or duties have been paid and impressed on the Trust Deed;
As duty requirements have changed over time, always check the duty requirements at the time the trust was created in the jurisdiction of the trust.
It follows that the client should be told that in order to give this certification you may need to undertake further investigation and a consideration of the laws that applied at the time that the trust deed was established and/or re-settled.
It may be that the lender will accept a warranty from the trustee in this regard rather than certification by the practitioner.
g. the Trustee(s) has/have been properly appointed in accordance with the Trust Deed and any applicable law;
This would usually only be within the knowledge of the person who established the trust such as the practitioner who prepared the deed and arranged for signing and stamping. It follows that the lender should be told to that the practitioner is unable to give this certification where they did not prepare the deed.
The reference to ‘any applicable law’ is too broad and the lender should either be more specific or delete this wording.
h. the rights and claims of the Bank under or in connection with any Transaction rank in priority to the claims and rights to the Trust assets of the beneficiaries of the Trust;
This is not a matter which can be certified by the practitioner.
Usually this issue is dealt with in a deed of subordination from the beneficiaries.
i. the Trust is not a managed Investment scheme requiring registration under the Corporations Act 2001 (Cwlth); and
If you the practitioner and/or the client are unsure the client should be referred to an appropriate MIS expert. In some instances it may be necessary to seek advice from the client’s accountant.
In any event this is not something the practitioner should be certifying. The bank should be seeking a warranty from the trustee in this regard.
I acknowledge that the Bank relies on my above opinions in entering into Transaction with the Trustee.
There is some argument that the effect of this wording is you are the practitioner is advising both the lender and borrower. This may give rise to a conflict. For this reason you the practitioner should insert an appropriate disclaimer such as: “I am not acting as your agent when providing you with this information.”
(Print name of practitioner)
LPLC form of file note
File note – meeting to advise about a guarantee
Date: Start time: End time: File no.:
Attendee (client): Author:
Name and address of interpreter:
If no interpreter used, state reason no interpreter required:
Issues discussed arising from documents
Purpose for the loan:
Loan Amount: $
Interest: Rate: Higher: Lower:
Security provided: (description/address/volume/folio)
☐ If more than one person present – conflict issues considered. (N/A)
(See rule 11 of the Legal Profession Uniform Law Australian Solicitors’ Conduct Rules 2015)
- Do the people have the same interest in the transaction?
- Do the people have the same assets or value of assets at risk?
Summary of explanation to client – regarding guarantee and mortgage
☐ The lender has agreed to lend money to the borrower.
☐ You are being asked to provide your property as security for the repayment of all money owing to the lender.
☐ To do that you are asked to sign these documents:
☐ These documents entitle the lender to register a mortgage or caveat over your property.
☐ Where the secured property is personal property the Lender will register its interest in the secured property on the Personal Property Securities Register (PPSR). Upon registration the lender will receive a token. Information on documents registered on the PPSR are publicly available for searching.
☐ The borrower must repay all money owing to the lender failing which demand can be made on the borrower and/or you to pay all money owing to the lender. The lender does not need to ask the borrower to pay the money back first. They can ask you to pay it first.
☐ The borrower and you must comply with the terms of the lending documents which usually provide that the borrower and/or owner of the Secured Property must:
- Insure the secured property.
- Pay all expenses, rates, taxes and charges in respect of the secured property.
- Keep the secured property in good repair.
- Obtain consent of the lender to any changes to the secured property such as demolition.
☐ The borrower and you will be in default where they fail to comply with the terms of the security documents. Examples of defaults are:
- All money owing to the lender is not paid by the due date.
- The borrower or you go into bankruptcy, enters into an arrangement with creditors, has a receiver or liquidator appointed.
- There is an unsatisfied judgment against the borrower or you.
☐ Where there is a default the lender may seek possession of the secured property and is entitled to any rent or other earnings derived from the secured property. The lender may choose the secured property you provided over any other property provided by the borrower as security.
☐ The lender will determine how much is owing to the lender.
☐ Usually the lender will write to a party at the address given on the security documents.
☐ On repayment of all money owing to the lender the borrower is entitled to request a form of release and/or discharge from the lender.
☐ The most important thing to know is you could lose your property.
Other information discussed
Client’s questions and statement of understanding
☐ I INFORMED the client in very clear terms that I was not expressing any opinion nor advising on:
- the viability of the transaction which the borrower was undertaking
- the borrower’s ability to make the required payments to the lender
- the client’s ability to make payment to the lender
☐ I FURTHER INFORMED the client that if in any doubt on those aspects the client should obtain independent financial advice before signing the documents.
Signed by the practitioner
☐ Copy of file note given to client
The following are attached to this file note.
☐ A list of the security documents provided to client.
☐ Certified copy of proof of identity documents.
1 David v David  NSWSC 8, Kowalczuk v Accom Finance  343, Spiteri v Roccisano  VSC 132; Permanent Custodians v king (2009) NSWCA 600