Let the lender beware

Date: May 02, 2009
Document Type: Newsletter

With a population which is aging, but is also mobile, more and more of us are giving Powers of Attorney, usually to partners or family. The usual Power of Attorney gives the attorney the power "to do on my behalf anything I may lawfully authorize an attorney to do". It also says, "This power of attorney is subject to the following conditions and limitations", and commonly the word "nil" appears there.

The law prohibits an attorney from signing a document which benefits the attorney unless the power of attorney authorizes the benefit - the attorney must act in the interests of the donor. A recent case highlights not only the attorney's responsibilities, but the responsibilities of third parties dealing with an attorney.

A son and his parents were co-owners of property. Mum and Dad were overseas for an extended holiday, and Sonny signed mortgage documents over the property. The loan was to be used partly to pay off an existing loan, and partly to enable the son to buy property in his own name. The lender was aware of the intended purposes of the borrowing. Things went bad, and the parents challenged the lender's reliance on the written direction by which the son had directed the lender's payment, a fair slice of which was clearly for his own benefit. There was no challenge to the attorney's power to sign a mortgage; the challenge was to the subsequent use of the power of attorney.

The court held that the lender could not rely on the signing of a payment direction by the attorney which is apparently in the exclusive interests of an attorney without checking to see if the transaction is legitimate. What are the ramifications of this?

When giving a power of attorney, the donors should consider whether any special benefits, conditions or restrictions are appropriate. Some may well be; spelling out that payments by an attorney for the donor's benefit are to be reimbursed, for example.

For lenders, whether financial institutions or private lenders, enquiries need to be made if there is any reason to suspect that a transaction is for the attorney's benefit rather than the donor's. If the power of attorney document does not provide an answer, the donor may be able to, but if the power of attorney is an enduring power, given by a donor who has since lost their mental capacity, a donor would be unable to assist.Transactions which the donor might have been happy to approve to help the attorney would become impossible.

The lessons: For a donor, consider all options when you give a power of attorney. For a lender, take care whenever a power of attorney is being used in such a way that it might be benefiting the attorney.

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