Securing fees with mortgage risky

The cost-of-living crisis is putting pressure on lawyers and clients alike, and the need for securing both payment and ongoing representation has led to a variety of innovative ways to achieve this.

One method that is becoming more common is taking a mortgage over a client’s property; as a recent decision shows, this is not without risks.

In that matter, a solicitor was engaged to act by a client in relation to property matters following the end of the marriage. The legal fees were secured via a mortgage over the client’s half-share of the property which the parties to the proceeding jointly owned.

That mortgage, which was 35 pages long, was presented at an early meeting regarding engagement and fees, along with other documents. The mortgage was signed by the client, and witnessed by the solicitor, without the client receiving any advice as to the nature and effect of the mortgage. The solicitor made no file note of the meeting.¹

During the course of the matter, the solicitor prepared a financial statement for the client, which she affirmed and which was filed in the court. It did not disclose the existence of the mortgage. The matter subsequently settled at mediation; at no point during the mediation was the existence of the mortgage disclosed.

The subsequent disciplinary proceedings were concerned with the following aspects of the solicitors conduct:

Advertisement

• Failing to make a file note of the meeting at which the mortgage was signed, given that the client was providing a mortgage to the solicitor’s firm to secure the funding of her matter;
• Witnessing the signature of the client on the mortgage, given that the solicitor was a director of the incorporated legal practice which was the mortgagee;
• Failing to disclose the existence of the mortgage during settlement negotiations involving his client’s financial position.

Ultimately, the Tribunal seems to have accepted that:

• the solicitor did advise the client to seek independent legal advice in relation to the mortgage, and the client declined that opportunity;
• the solicitor, through a lack of diligence, failed to make a detailed note of that meeting,² which failure amounted to unsatisfactory professional conduct;
• although not part of the charges, a solicitor taking a mortgage over a client’s property to secure fees should turn their mind to whether or not the circumstances warrant an independent party, rather than the solicitor, witness the client’s signature;³
• the solicitor’s failure to disclose the existence of the mortgagee when it was clearly relevant to the mediation, resolution, and forming of the consent orders – despite being the result of a mistake rather than dishonesty or deception – amounted to unsatisfactory professional conduct.⁴

Outcome

The solicitor was reprimanded and ordered to pay the costs of the Legal Services Commission. The tribunal noted that the severity of the orders was affected by the fact that the solicitor:

• had voluntarily removed the mortgage;
• did not seek to recover any fees from the client; and
• personally paid the interest of $14,684.43 to the funder.⁵

It is clear from the decision that in other circumstances the consequences could have been much more severe, and the case is worthy of careful consideration. Any practitioner seeking to secure fees via a mortgage over client property should read this decision carefully.

Practical takeaways

Prudent practitioners who seek to secure fees in this way should consider the following steps:

Advertisement

• ensure that the client obtains independent legal advice before agreeing to the mortgage (if the client refuses to do so, take a detailed, accurate and contemporaneous record or file note of the interactions and discussions with the client on this issue and consider whether it is appropriate to continue to act nb: r 12 ASCR);⁶
• confirm the client’s instructions in writing before proceeding;
• refrain from witnessing the client’s signature on the mortgage; and
• during any negotiations in relation to the matter or connected proceedings, consider whether or not the existence of the mortgage is relevant and must be disclosed.⁷

NB: The decision appears to contemplate (at [35]) that a solicitor might themselves give advice to the client on the effect of a mortgage the solicitor is taking over the client’s property. That is not a course of action the QLS Ethics and Practice Centre would recommend, and a practitioner considering this should consult the centre and consider their professional indemnity insurance before doing so.

Footnotes
¹ Legal Services Commission v Hallam [2024] QCAT 386, [18].
² Ibid, [30].
³ Ibid, [41]-[43].
⁴ Ibid, [77].
⁵ Ibid, [88].
⁶ See Australian Solicitors Conduct Rules 2012 (at 1 June 2012) r 12.
⁷ Ibid, [57].