A defensible file in a private lending matter is built from the first conversation. Acting for private lenders is one of the most persistent claims areas the LPLC sees. Here is what that looks like in practice, and what happens when it doesn’t.
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What can go wrong
The following matter involved an experienced, diligent practitioner who did many things right. The outcome illustrates how quickly systemic pressures – urgency, a client who will not listen, a broker pushing the timeline – can overwhelm sound professional instincts.
Case study A practitioner received a call from a broker at 2.30pm asking them to see a new lender client at 3pm the same day to execute loan documents for an urgent transaction. The loan was $170,000 for 30 days at 25% interest, supported by a caveat and an unregistered second mortgage over a Melbourne residential unit. The first mortgage secured a debt of $590,000. Despite the timeline, the practitioner conducted title searches before the meeting, prepared loan documents, and refused to proceed until the borrower had signed. The practitioner advised the client orally, confirmed by a file note, and in writing that this was a risky loan, recommended an independent valuation, and sought written confirmation from the bank of the amount secured. The client insisted the matter proceed anyway. The loan was not repaid. Negotiations ran for six weeks. The second mortgage was not registered until five months later due to delays obtaining title. When it was registered, it secured nothing: the first mortgagee held an all-monies mortgage cross-collateralised with another loan, leaving no equity in the property. The client alleged they had received no advice about the risks of a second mortgage. The practitioner had not given that advice expressly, having assumed the client – an experienced accountant and property developer – understood what a second mortgage meant. The claim was resolved before trial. | ||
The lesson is not that the practitioner failed. It is that private lending transactions carry structural risks that can overwhelm good professional instincts, and that some situations are so risk-prone that declining to act is the right call.
Why private lending is high risk
The risk escalates when any of these features are present:
- The lender knows the borrower personally – trust substitutes for security
- The loan is short-term, high-interest, or urgently required
- The client is a sophisticated businessperson who assumes they understand the legal issues
- The security is a second mortgage or caveat only
- There is broker or timeline pressure to proceed before proper due diligence is complete.
What to do
The following steps address where claims concentrate in private lending matters.
1. Verify the security, before any documents are executed.
Conduct a title search to confirm ownership and existing encumbrances. Recommend an independent valuation of the security property and obtain written confirmation from any existing mortgagees of the amounts secured against it. When a valuation is provided, examine it carefully, including for:
- an inaccurate description of the property
- a valuation based on assumed project completion rather than current value
- failure to address lease terms or planning restrictions
- material differences between the valuation and any recent contract of sale.
2. Advise in writing and record the client’s response.
Give the client a letter of advice before documents are executed, not after. Record the advice given and the client’s response in a detailed file note. If the client rejects advice, record that rejection in writing explicitly. Do not leave it implicit in a general file note about the meeting.
3. Name the specific risk — do not assume the client understands it.
Experienced businesspeople frequently do not understand the legal implications of second mortgages, caveats, cross-collateralisation, or all-monies clauses. If a second mortgage is risky in the circumstances, say so expressly. If there is insufficient equity in the security, say so in terms the client will understand. Give the client time to absorb the advice before proceeding and repeat it if they do not appear to have done so.
4. Consider declining to act where the client will not receive the advice.
Some private lending matters carry risk that cannot be adequately managed if the client insists on proceeding without the recommended protections. Where the loan is urgent, the client is unwilling to obtain a valuation or security confirmation, or the client is proceeding based on misplaced trust in the borrower, declining to act may be the most defensible course.
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