- The Lending Code and Guarantees
- Individual Guarantees: the requirement for independent legal advice
- Regulated Mortgages Briefing paper
- HMRC consults on significant extensions to withholding tax on interest
- A Guide to Financing "Shadow Yachts"
Individual Guarantees: the requirement for independent legal advice
Whether a bank is a subscriber to the Lending Code or not, the recent cases of Trustees of Beardsley Theobalds Retirement Benefit Scheme v Yardley (2011) and Heather Padden v Bevan Ashford (2011) have once again highlighted the need for banks taking guarantees from individuals to take care to mitigate the risk of such guarantees being unenforceable by ensuring that sufficient independent legal advice is taken by the individual at the time of entering into the guarantee.
Previous case law (RBS plc v Etridge (2001)) has established that undue influence arises where a certain relationship exists between two parties with trust and confidence, reliance, dependence or vulnerability on the one hand and ascendancy, domination or control on the other. It also sets out circumstances where undue influence will be presumed. These circumstances include husband and wife relationships; relationships where the debtor and the guarantor are not commercially connected; and where the transaction seems clearly for the benefit of one party and not the other.
The presumption of undue influence can be rebutted by the creditor (i.e. the bank which may be seeking to benefit from the guarantee or security in the future) requiring the individual to seek independent legal advice before signing the guarantee (or security document) and that individual's lawyer certifying that they have advised their client of the contents and risks associated with the security.
In the case of Yardley, Mr Yardley was an employee who was induced by the director of a company to sign a lease as guarantor. However he was not provided with full information about the transaction or given the opportunity to take independent legal advice prior to signing the guarantee in question. He was in fact only shown the last page of the lease when he was asked to sign the document, and there were no indications from this page that it imposed guarantor obligations on him. A defence of undue influence was upheld by the High Court with the effect that the guarantee that Mr Yardley had signed was unenforceable.
The case of Heather Padden involved a mortgage rather than a guarantee, but it examined how these two requirements are satisfied and it now appears that the simple giving of advice by a lawyer may not be enough. Mrs Padden signed over her matrimonial home after being assured by her husband's lawyer that the only way to prevent him going to prison was to sell the property and pay the creditor (from whom her husband was accused of stealing money). She walked in to a solicitor's office, the solicitor witnessed the signing of the deed and also signed a certificate confirming he was aware that Mrs Padden had had the consequences of the deed explained to her.
However the court held that where the advising solicitor has not made proper inquiry into the circumstances and motives behind the one-sided security transaction, that solicitor is not in the position to certify or confirm that the client had received independent legal advice.
Best Practice Tips for lenders when obtaining guarantees from individuals:
1) Always require the individual guarantor to appoint an independent solicitor to provide him / her with legal advice on the potential consequences of entering into the guarantee, and request evidence of such (in the form of a certificate of execution signed by the appointed solicitor).
2) The lender should check and approve the solicitor / law firm which is appointed by the individual guarantor to provide the requisite independent legal advice. Best practice is to ensure that the appointed solicitor writes to the individual guarantor following a meeting with such guarantor setting out the advice given.
3) In addition, the lender should ensure that the appointed solicitor has carried out due diligence on the individual guarantor and knows the background of the lending transaction, as a way of ensuring that sufficient legal advice has been provided to the guarantor. We recommend that the certificate in (1) above should specifically address this point.
For further information, please contact Hannah Salton in the Finance Group at Field Fisher Waterhouse LLP.