When a lender asks for a personal guarantee, it usually comes with the requirement that the proposed guarantor seeks independent legal advice.
We are often asked why and what type of legal advice should be given, read on to find out.
The simple answer – undue influence.
When a person has given security for, or has guaranteed a loan to another, and was induced to do so by the ‘undue influence’ of the principal debtor, the security or guarantee may be unenforceable by the lender.
Following the judgment of the House of Lords in Etridge*, a lender is put on notice of undue influence if there is a non-commercial relationship between the parties. In these circumstances, most lenders will require the personal guarantor to seek independent legal advice to provide comfort to the lender that they have not been unduly influenced.
The requirement for independent legal advice also aims to ensure that:
- the guarantor freely enters into the guarantee; an
- the guarantor fully understands the consequences and risks associated with giving the guarantee.
What should the independent legal advice cover?
In Etridge, the House of Lords outlined the following ‘core minimum’ requirements for a solicitor when giving independent legal advice:
Are different solicitors required to act for the guarantor?
While the House of Lords in Etridge considered that there were advantages in the guarantor being advised by a separate solicitor to the borrower, the potential cost implications may outweigh those advantages. In light of this, and the professional and legal duties owed by a solicitor to his or her client, the same solicitor may act for both the borrower and the guarantor, provided they are comfortable doing so.
*Royal Bank of Scotland v Etridge (No 2) and other appeals  3 FCR 481