What is Independent Legal Advice and when is it used?

Independent Legal Advice (ILA) means impartial advice provided by an independent solicitor. The idea behind an ILA is to protect an individual from signing any document before understanding the risks of the transaction. 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:

1. Director's Personal Guarantees (on corporate loans and mortgages)

2. Personal Guarantees (where an individual guarantees repayment of a loan made to someone else);

3. 3rd Party Legal Mortgages (where the borrower is not the same person as the person offering the lender security); and

4. Occupier's Consent to a Mortgage Transfers of Equity.

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 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:

1. The nature of the documents;

2. The financial risk that can arise if the borrower's business fails, including the possibility of bankruptcy;

3. 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;

4. The fact that the lender may alter the terms of the loan including increasing the amount borrowed without reference to the individual;

5. Discussing whether to negotiate with the bank on the terms of the transaction (e.g. limitation on the amount borrowed);

6. Explaining that there is a choice on whether to sign the documentation. The proposed transaction will be explained in simple and non-technical language.