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Personal Guarantees - take them seriously

27 November 2015

Guarantees are complex documents which are difficult for a layperson to understand. Some things you should be aware of are: ...

Craig had been employed as a farm worker for several years. Craig had saved carefully and planned to buy his own herd. Craig’s mother June was keen to help and offered to give Craig’s bank a guarantee so he could borrow enough money to buy some cows. June told Craig to go ahead and sign the sale and purchase agreement because she would back him. It wasn’t until June saw her lawyer to sign the bank security documents did she fully appreciate what it meant to give her guarantee. It would have been very stressful for Craig if June had decided not to sign the guarantee documents at that stage. Craig was already committed to buy the cows. If June refused to sign the guarantee, Craig might not be able to raise the money elsewhere and could suffer serious consequences for defaulting on the purchase.

Beware of the fine print

Guarantees are complex documents which are difficult for a layperson to understand. Some things you should be aware of are:

  • You will be liable to the bank as if you are the borrower. For example, if the loan is repayable “upon demand” (such as an overdraft), the guarantee could be called upon at any time.
  • If you wish to borrow money in future, your lender will take any guarantees you have given into account when deciding whether to lend to you.
  • The bank can choose who to sue if the borrower does not pay – the borrower, you or any other guarantor. If you pay the bank then you will have to recover the amount you have paid from the borrower and/or the other guarantor.
  • If you have given a mortgage to the bank, the bank could use its powers under the mortgage to sell your property to obtain payment.
  • The borrower might have guaranteed someone else’s borrowing from the bank and therefore you might also be liable for these guaranteed amounts.
  • The bank usually has the right to take money out of your accounts to satisfy the guarantee.
  • The bank will not automatically release the guarantee when the loan has been repaid or the bank is satisfied with securities for the loan. You will need to ask the bank to release the guarantee.


What you should do if asked to give a guarantee

Before you agree to give a guarantee you should ask to see the documents you will need to sign and take them to your lawyer for advice. You should also familiarise yourself fully with the personal and financial circumstances of the borrower. You might need to obtain advice from an accountant regarding the borrower’s financial position. If you don’t understand anything ask your lawyer to explain it to you.

The guarantee should be for no more than is necessary – in most cases you should be able to limit the amount of the guarantee. While the guarantee is in place you should ensure you are kept fully informed of the borrower’s circumstances, progress with repayment and any changes to the loan arrangements.  Finally, make sure you ask the bank to release the guarantee as soon as you can.

 

Please email me at barbara.mcdermott@nwm.co.nz with your ideas for future articles. Keep an eye out for next month's column, where I will discuss another relevant rural legal issue.


Barbara McDermott is a partner of Norris Ward McKinnon, specialising in commercial and rural law. With offices in Hamilton and Huntly, we have friendly, expert legal advisors ready to help you with your business and personal legal matters.