About Independent Legal Advice
An independent advisor will sign a certificate confirming that they have provided the relevant advice, followed by their client’s signature.
An ILA is commonly required in the following circumstances:
Director’s Personal Guarantees (on corporate loans and mortgages);
Personal Guarantees (where an individual guarantees repayment of a loan made to someone else);
3rd Party Legal Mortgages (where the borrower is not the same person as the person offering the lender security);
Occupier’s Consent to a Mortgage Transfers of Equity; and
Joint Borrower, sole proprietor mortgage
Whilst this type of ILA is normally a bank requirement, please do not underestimate the real need for this advice – it’s not a formality, nor just witnessing a signature. The House of Lords in Etridge has made clarification to the law on undue influence and to avoid the risk of being sued by a guarantor, it can only be deflected by providing an ILA. Therefore, the mortgage lender requires the guarantor in a mortgage/loan to obtain ILA before the guarantee is given.
The principle of ILA
The underlying principle is to ensure that the guarantor clearly understands the transaction. A qualified solicitor will meet with the individual in person, in the absence of the borrower, and discuss the following:
The nature of the documents;
The financial risk that can arise if the borrower’s business fails, including the possibility of bankruptcy;
The seriousness of the risks involved – with reference to the purpose, amount and terms of the new facility and whether other assets may be at risk to cover repayment if the business fails;
The fact that the lender may alter the terms of the loan including increasing the amount borrowed without reference to the individual;
Discussing whether to negotiate with the bank on the terms of the transaction (e.g. limitation on the amount borrowed);
Explaining that there is a choice on whether to sign the documentation. The proposed transaction will be explained in simple and non-technical language.
