Royal Bank of Scotland v Etridge (No.2) [2001] UKHL 44; [2001] PLSCS 216 lists the obligations of lenders and solicitors if a guarantor is providing security for the borrowing of a third party, who might be in a position to exert undue influence over him or her. The decision in HSBC Bank plc v Brown [2015] EWHC 359 (Ch) reminds us that lenders who fail to adhere to the ruling in Etridge do so at their peril.
The argument centred on whether the bank was entitled to rely on a certificate given by a law firm stating that it had given independent legal advice to a borrower’s mother, who was an elderly lady, before she executed a legal charge over land in respect of her son’s borrowings. The landowner claimed that the law firm had not advised her at all and denied liability under the charge. The judge accepted her evidence and declared that the charge was unenforceable.
Following Etridge, banks must ask prospective guarantors to name a solicitor who will provide them with independent legal advice. The bank must tell the guarantor that the solicitor will be required to confirm that he has explained the nature of the documents and their practical implications to the guarantor and that this is intended to eliminate any challenge to the validity of the documents that the guarantor will be signing. This is designed to drive home the seriousness of the transaction. The bank must then provide the guarantor’s solicitor with the financial information that the solicitor will need to advise the guarantor. This information will vary from case to case, but should include details of the borrower’s current indebtedness, the limit of any current facility, and the limit and terms of any proposed facility.
Solicitors instructed by prospective guarantors should explain the documents and the risks to their clients, and advise them that they can refuse to provide a guarantee. They must ask whether their clients would like them to renegotiate any terms in the documents, before ascertaining whether the guarantor wishes to proceed and writing to the bank to confirm that the appropriate advice was given. In doing so, the solicitor is not the bank’s agent; he acts solely for the guarantor.
Any deficiencies in the advice provided to the guarantor will then normally be a matter for the guarantor and his or her solicitor. Lenders will be entitled to proceed on the assumption that solicitors have done what they say they have done. However, if a bank knows, or ought to have realised from the facts, that the guarantor has not received the appropriate advice, it proceeds at its own risk.
HSBC was unable to produce evidence of any communications with the guarantor proving that it had complied with the requirements laid down in Etridge in this particular case. In addition, the judge could not be certain whether the solicitor that provided the certificate to the bank had received a copy of the relevant facility letter or had been given sufficient information by the bank to advise the guarantor in the manner laid down in Etridge.
The bank had not taken the necessary preliminary steps to protect itself, or to constitute the solicitor who provided the certificate as the guarantor’s agent. The bank ought to have realised that the guarantor had not received the core minimum advice specified in Etridge. Therefore, it proceeded at its own risk, even though the guarantor might have executed the legal charge anyway.
Allyson Colby is a property law consultant
