Aug 07, 2021
THE NEW REALITY: PRIVATE MORTGAGE DEFAULTS - POWER OF SALE & FORECLOSURE - Part LIV of a Series - Personal Guarantees part 5
In the previous Post LIII I explored ILA – Independent Legal Advice - and answered the question: What is ILA? In this post, I want to examine when ILA is needed.
The answer to this poser is rather simple. A person needs ILA when they enter into a contract that imposes liability on her or him, when that party does not benefit from the contract economically – or at least benefits very little from the contract. Common examples are:
- when a home owned by one spouse is mortgaged and the other spouse guarantees the mortgage
- when a business owned by one spouse borrows money and the other spouse mortgages her or his interest in the home to secure the business loan
- when a parent co-signs a loan to a child to assist the child in buying a home or motor vehicle, for example
This is not an exhaustive list. Just an example of the more common situations where one party is giving security or providing their covenant to a lender to help another, usually a spouse, partner or child. The common thread is that while the borrower gets the benefit of the loan, the third party giving the mortgage or co-signing the loan really gets nothing (or very little) in return.
This is not a ‘contract’ issue. The mortgage or the co-signed contract is perfectly valid and otherwise enforceable. But, if the party who does not benefit from the arrangement is at a serious disadvantage, by reason of her or his own needs or desires, or because of his or her own ignorance or infirmity, and if it can be proved that that person only entered into the bargain because of undue influences or pressures brought to bear on her or him – usually from a relative or other loved one – the contract just might not be enforceable against that party. The lender may lose the benefit of the bargain because of an inequality of bargaining power. Unless that party had independent legal advice.
And so, ILA is really a shield that can be used by a lender when a loan is made and a third party is assisting the borrower. The lender can’t really know much of the relationship or circumstances, and can’t know whether the party assisting may be disadvantaged, or under the influence of the other, So, the lender requires all third parties who assist with the contract to receive ILA and remove the possibility of discovering later that the contract would not be enforceable against that third party. ILA shields the lender from the third party's assertion that there was an inequality of bargaining power and as such, the contract should not be enforceable against her or him.
I do not usually mention legal cases in my blog, but this equitable principle allowing a third party to escape from the detriment of inequitable contracts was first espouse by the English Lord Denning in his oft quote Lloyd Bank Ltd. v. Bundy decision from 1974. The decision is available on line at https://www.bailii.org/ew/cases/EWCA/1974/8.html and is a fascinating read. Beautifully written. Groundbreaking in effect. Enjoy……..
Next blog will move on to a new topic to be determined. As always, this blog is intended for information purposes only. It is not legal advice and cannot be relied on as such. Nor is it a substitute for hiring your own legal counsel, who will be an essential member of your mortgage default and power of sale team. And lastly, this blog is just my opinion. I reserve the right to change my mind. And I reserve the right to be wrong.
Be well and stay healthy.