Independent legal advice for guarantors: what you are actually signing

What a guarantee actually means

A guarantee is a promise that if the borrower does not pay, you will. Most bank guarantees are 'all monies' guarantees, which means they cover not just the loan in front of you today but future advances, redraws, increases, interest, default interest, and the lender's enforcement costs.

If the guarantee is supported by a mortgage over your home — the usual position for a parent guaranteeing a child's purchase, or a director guaranteeing a company facility — the lender does not have to chase the borrower first. It can call on you, and it can sell your house to recover the money.

Why the lender wants a certificate

Courts have set aside guarantees where the guarantor did not understand what they were signing, was under the influence of the borrower, or was in a relationship of trust that the lender knew about. The leading Australian authority is Garcia v National Australia Bank, where a wife guaranteed her husband's company debts, received no benefit and did not understand the transaction. The High Court set the guarantee aside.

Lenders now manage that risk by requiring evidence that a solicitor independent of the borrower explained the documents to you. That evidence is the certificate of independent legal advice, sometimes called a solicitor's certificate or an ILA certificate. It protects the lender's ability to enforce. It does not make the guarantee a good idea.

Who is usually asked for one

The same handful of situations come up again and again:

• Parents guaranteeing a child's home loan, often with a limited guarantee secured over the family home
• Company directors and their spouses guaranteeing a business loan, overdraft or equipment finance
• Guarantors on a self managed super fund limited recourse borrowing arrangement
• Incoming tenants and their guarantors on a commercial or retail shop lease
• Family and related-party loan agreements, granny flat arrangements and family property transfers
• Parties signing consent orders or a binding financial agreement where each side must have independent advice

What happens in the appointment

We read the loan and security documents before you arrive, then take you through them in person or by video. We cover the amount and type of guarantee, whether it is limited or all monies, what property secures it, what triggers a default, what the lender can do on default and in what order, and how and when the guarantee can ever be released.

We also ask the questions the bank will not: what happens if the borrower separates, dies, loses their job or the business fails; whether you could service the debt yourself; and whether a limited guarantee, a smaller loan or a different security structure would achieve the same result with less exposure. If we think you should not sign, we say so — and then it is your decision.

Saying no, or signing on better terms

You are not obliged to sign because the loan is already approved and settlement is booked. In practice there are usually options: cap the guarantee at a dollar figure, limit it to a specific facility rather than all monies, ask for the guarantee to be released once the loan-to-value ratio drops below a level, or have the borrower take lenders mortgage insurance instead.

Those changes have to be raised before you sign. Once the guarantee is executed and the facility is drawn, your negotiating position is gone.

What it costs and how quickly it can be done

Our independent legal advice certificates start at $990 including GST for a standard guarantee or loan and security package, and $2,000 including GST where the transaction involves a self managed super fund — those need the trust deed, the bare trust and the limited recourse borrowing structure reviewed as well, which is a different piece of work. We confirm the fee before we start. Most appointments are booked within a day or two and the certificate is issued the same day. Call 0488 340 853 with the documents in front of you.

Independent legal advice questions we are asked