Warning to solicitors to ensure detailed file notes are kept of advice to borrowers

The recent NSW Supreme Court decision of Bakovski v Lenehan [2014] NSWSC 671highlights the importance of solicitors both protecting their clients’ interests when necessary when acting on mortgage transactions, and keeping contemporaneous records of their dealings with borrowers, lest they be sued when the borrower defaults.

In Bakovski, an elderly couple with limited English believed they were entering into a mortgage as guarantors for a loan to an acquaintance property developer, a belief which was orchestrated by the developer. In actual fact, the loan was to them as borrowers. The couple obtained legal advice and signed an acknowledgement to that effect. They sued the solicitor for negligence.

The court found that the solicitor did not advise the couple that they were entering into a loan, nor the legal effects and risks of the mortgage. The court found that the solicitor should have given strong advice to his relatively unsophisticated clients not to enter into the transaction given the harsh and oppressive terms as well as the short term of the loan, and in that sense he should have acted as “gatekeeper” of his clients’ interests. The fact that the solicitor did not do so was a gross departure from the standard of due care, skill and diligence required of a solicitor.

The solicitor said that he did give that advice. The expert evidence indicated that, in the very least, where a solicitor provides strong advice which a client refuses to accept, the prudent solicitor should make detailed contemporaneous file notes. The Court therefore concluded that the absence of a file note, or other record of that advice, the advice was not given.

Similarly, in Provident Capital v Papa [2013] NSWCA 36,which was cited with approval in Bakovski, it was found that while solicitors are not ordinarily required to advise on the wisdom of transactions, the scope of a retainer to give independent legal advice on loan and mortgage transactions may require more than an explanation of the legal documents. It may require the solicitor to advise on the practical effect of failure to comply with the agreement. For example, if a solicitor had sufficient information to apprehend that the borrower will lose their home and livelihood, they ought to recommend at least that financial advice be obtained.

In Provident v Papa, an elderly mother borrowed on the security of her home from which she ran a business and on-loaned the money for her son’s business which was not doing well. The lender was on notice of the precarious financial position of the son’s business and the Court found the solicitor’s duty in advising the mother extended to advising her to obtain independent financial advice as to whether the son’s company had the capacity to pay.

 

Bransgroves recommends that lenders require solicitors providing advice to borrowers on mortgage documents keep detailed file notes of their dealings, or better still videotape the giving of advice and the borrowers signing the documents. This will assist the lender in answering unconscionability defences.

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