A SIMPLE EXPLANATION OF YOUR OBLIGATIONS
It is now a common requirement of banks / lenders that a guarantor signs to provide security to the bank / lender. It is further a requirement that the guarantor receive independent legal advice on guarantee documents. The banks / lenders require a solicitor to sign a Legal Advice Certificate confirming the advice given. This certificate can form part of the guarantee or may be a separate document and is relied upon by the banks / lenders in lending the money.
This certificate of independent legal advice essentially provides the bank with assurance that the Guarantee document has been executed by the guarantor willingly after having received independent legal advice on the full force and effect of the document and that the guarantor is aware of their obligations. The legal advice guarantors receive prior to signing can be the most important piece of advice they ever receive.
Before you agree to go guarantor it is important to remember that as guarantor you will be stepping into the shoes of the borrower in the event they are unable to satisfy the terms of the contract with the lender.
What is a Guarantee / Guarantor?
A guarantee is a promise by the guarantor (the individual providing the guarantee) to assume the debt obligation of a borrower if that borrower defaults under the terms of the loan contract.
A guarantor essentially allows the equity in his or her own property, and all their other assets, to be used as additional security for the borrower. The primary security for the loan will be the mortgaged property, but the lender may also take a mortgage over the guarantor’s property.
Limited vs Unlimited guarantees
A guarantee can be limited (ie the guarantor’s liability only extends to a fixed amount or portion of the loan amount) or unlimited in amount, meaning as a guarantor you are liable for the entire debt. The guarantee documents will detail how exposed the guarantor’s assets are.
A guarantee may be for only a certain period of time (ie only for x years) or a continuing guarantee (continues until there is a deed of release signed). It is important to check and know what the terms of the guarantee documents you’re signing include.
Jointly and Severally?
Where there are 2 or more guarantors are named, it is often listed in the guarantee documents that the guarantee is to be provided jointly and severally. This means that the bank / lender can take action against the guarantors jointly (ie both guarantors together) or severally (ie only one of the guarantors). The severally part means that each individual is potentially liable for the entire debt amount of the guarantee.
What is an Indemnity?
An indemnity is an obligation (that is usually in addition to the guarantee) where you are responsible for the losses incurred by the borrower and / or against lender. If the borrower defaults, the indemnity gives the lender the right to shift the loss it has incurred onto you as the guarantor.
What is the extent of the guarantee?
Depending upon the type of facility required and the guarantee being provided, the guarantor could be liable for:-
- A specific transaction (ie a single house loan); or
- An all inclusive guarantee (ie in a business sense covering any past, future borrowings).
Who can be a guarantor?
Guarantors are generally limited to immediate family members or associates of the borrower. Normally, this would be a parent but guarantors can include siblings and grandparents. Some lenders will allow extended family members and de facto spouses to be a guarantor to a loan, but this varies depending on the lender. Guarantors may also be required where the borrowing in made in a company or trust scenario (asset protection vehicle) or for a business loan.
How do I know the borrower can afford the loan that I am guaranteeing?
You will need to satisfy yourself that the borrower is able to meet the terms and conditions of the loan, including whether or not they have the ability to meet the required repayments. It may be that in addition to obtaining independent legal advice you also need independent financial advice (even if it is not a condition of the loan). BNT Legal can provide you with legal advice but not financial advice, however BNT Legal have a network of financial planners and advisors that they highly recommend and refer you to in relation to (but not limited to):-
- Assessing whether the borrower can meet its obligations under the loan;
- Assessing whether the guarantor can meet the obligations under the guarantee.
What are the implications for the guarantor if the borrower cannot pay back the loan?
If the borrower is unable to pay back the loan according to the terms of your contract, the bank / lender can take legal action against you as the guarantor. You as the guarantor will be liable for the amount specified in the guarantee (whether limited or unlimited) and most likely for all costs associated with the bank / lender enforcing the guarantee.
Will I receive notice if the Borrower is in default under the loan?
Depending on the terms of the loan agreement and guarantee agreements, as guarantor you may not be entitled to notice of the borrower’s default and the first notification you get of the borrower’s default is when the bank / lender has made a call against you as the guarantor to cover the borrower’s debt.
Does the Bank have to take enforcement against the borrower first to recover the debt before taking legal action against me as guarantor?
Generally, as a guarantor you will have no right to insist that the lender proceeds first against the borrower or enforce against the borrower’s securities before enforcing the guarantee. This means that in the event the borrower defaults, your assets can be sold by the bank to repay the loan under the guarantee provided.
Do I have to sign the Guarantee?
No. If after receiving advice on the guarantee documents you are uncomfortable with the conditions of the guarantee, you as the guarantor do not need to sign the guarantee documents and the borrower may need to find another way to secure funding.
BNT Legal can review your guarantee documents and advise you on the above scenarios specific to your guarantee documents and provide solicitor’s guarantee certificates in appropriate cases, once the appropriate level of legal advice has been provided. BNT Legal can also assist in the settlement of any residential or commercial properties.