Can a lender rely on a solicitor’s certificate of advice given to a borrower’s attorney?

The elderly are frequent users of powers of attorney. But how far can lenders go in allowing attorneys to act on behalf of borrowers who would normally require a certificate of independent legal advice? Should a lender always accept a certificate of legal advice given to the attorney of the borrower and not the borrower personally?

No, according to the NSW Court of Appeal in Spina v Permanent Custodians Limited [2009] NSWCA 206. In that case the son of an 86 year old Italian woman with no income living in a nursing home mortgaged his mother’s home, her only asset, as security for a $400,000 loan using his enduring power of attorney for her. The bulk of the loan was for her son’s benefit. The transaction was varied to relieve the mother of liability to repay monies she did not receive: her debt was reduced to $76,000.

There was no evidence that the mortgagor was incapacitated. The mortgagee obtained a certificate that the son had received independent legal advice, but did not obtain one to the effect that the mother had received such advice. In fact, she had not. The son signed the loan documents and mortgage as attorney.

The mortgagee’s lending guidelines were not observed when making the loan.

Judge Young’s comments are noteworthy:

“Decisions of this and other courts over the last 30 years have shown that transactions where a third party puts up his or her house as guarantor for a child or niece or nephew’s business purposes are ones in which the guarantor needs to be seen personally and needs to understand the ramifications of the transaction or else it may be set aside…

Indeed, these matters were recognised by the lender in its operations manual. The present situation was not quite like a surety giving a mortgage over her property in respect of another person’s borrowing; it was a joint borrowing, but the facts and circumstances on the application form show that the transaction was very similar to a guarantor situation. There was no material that has been put to us to show that Angelina was connected with the business or with the investments that were proposed to be made. Her son held a power of attorney and was signing documents for her. The situation cried out for someone to actually talk to Angelina face to face…

The lender sought to obtain a certificate of independent advice. Had the finding been that Angelina was not capable intellectually of understanding the transaction, it may be that the statutory declaration made by the donee of her power of attorney might have sufficed. However, if the situation was that there was no reason to suspect Angelina’s intellectual capacity, a certificate by the donee of the power of attorney was worthless. What had to be obtained was material to show that the donor of the power of attorney fully understood what was happening, and that was never obtained. Instead, the lender and its Queensland solicitors accepted the statutory declaration of the donee which referred only to advice given to that donee…

In my view in the present set of circumstances, if a lender is to rely on independent legal advice being given to the borrower, the latter herself must receive the independent legal advice.

Of course, the position would be different if the borrower were clearly incapable, or if the transaction were clearly for her benefit, or if the transaction was a purely commercial one with no flavour of possible influence from or benefit to some relative or friend.

It is difficult for me to agree that a reasonable person would not see a “red light” when considering the scenario that the application for finance was being made:
(a) by an 86 year old retired lady;

(b) by her son as her attorney;

(c) in circumstances where the son took a benefit;

(d) over the 86 year old’s major asset;

(e) where there was no material to show the lady personally had been given legal advice;

(f) where, if the son died or was unable to repay the loan out of his income, the lady’s home was at risk.”

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