What is a solicitor certificate?
Borrowers and guarantors in SMSF transactions are often required to obtain independent legal advice before they can draw down on their loan.
A solicitor certificate is a document signed by your solicitor certifying that you received this legal advice.
Why do I have to get a solicitor certificate for my SMSF bank loan?
The short answer is that the bank wants you to understand your obligations under the loan documents.
The long answer is that the bank is concerned that its loan documents and mortgage may not be enforceable against you if did not understand the documents or you were unduly influenced by a third party. A solicitor certificate helps the bank manage this risk by ensuring that you have the documents explained to you.
This isn’t a document that should be obtained lightly, and there are multiple risks involved for the guarantor if they aren’t paying attention.
The need for personal guarantees
SMSF lending is always done using a limited recourse borrowing arrangement (LRBA). An LRBA means that if the loan goes into default, the amount the bank can recover (have recourse to) is limited to just the security property. On a superficial level this means that the rest of your superfund is protected in the event that your property investment is unsuccessful. There are good public policy reasons for this and it is the reason banks tend to offer smaller (50% to 70%) loans to SMSFs.
While this sounds like good news for borrowers, there is a catch! Your bank will almost definitely require the directors of the trustee for the SMSF (you) to personally guarantee the loan. This means that if the investment fails, the bank sells the security property, and the proceeds of the sale are not enough to pay back the bank – you will have to pay the shortfall.
Some (but not all) guarantee documents also include a charge over any properties that you own. This means you could actually be putting your family home up as security for your SMSF investment. Sneaky!
National Credit Code
The National Credit Code is a collection of consumer protections that regulate the provision of credit to individuals. It is designed to prevent predatory lending practices.
As most SMSFs have a company as trustee and bare trustee, most SMSF loans are not regulated by the National Credit Code. This means that the borrowers and guarantors do not have the consumer protections people usually take for granted.
This allows for general charges over personal property, quicker enforcement after default, and less responsible lending requirements. For this reason, even if a solicitor certificate were not required by the bank – it is still worth obtaining advice from a competent solicitor before entering into an SMSF loan.
Unseen fees and charges
Your lawyer will also walk you through all of the fees and charges, some of which could be hidden. Having a professional look over the paperwork ensures that there won’t be any surprises after the loan is drawn down. The same goes for the terms of the loan and the rate given.
What is the process for getting a solicitor certificate?
Your lawyer will carefully read the loan contract, mortgage, guarantee, and associated documents.
A good lawyer will provide you with a written summary of your obligations under the loan.
They must then meet with you in person to verify your identity and provide the advice.
Finally, they will sign the solicitor certificate and witness your execution of the loan documents.
What are the costs for a solicitor certificate for an SMSF bank loan?
Acquiring a solicitor certificate for an SMSF is not a five-minute affair. The lawyer in question isn’t just witnessing a signature but needs to review all the documents present. The solicitor’s signature on the certificate is a professional promise to the bank that the advice has been given, so lawyers have to make sure that all the paperwork is in order and that all parties understand the full implications of what they are agreeing to.
A solicitor certificate usually costs $600 for a normal turnaround of two clear business days, or $800 for an urgent turnaround (e.g. if settlement is overdue).