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Personal Guarantees - Take Them Seriously

18 July 2012

It is not uncommon for a bank or other lending institution to require a family member to personally guarantee borrowing for the purchase of a property or business. In most cases the family member who is giving the personal guarantee has total confidence in the borrower’s intention and ability to repay the loan and understands the liability which can arise from the guarantee.

It can be very stressful for all involved if the guarantor decides not to proceed with the guarantee when the borrower is already committed to the purchase. Sometimes this happens because the guarantors do not fully appreciate the liability involved until they receive legal advice on signing the documents. If the guarantor refuses to sign the guarantee, the borrower might not be able to raise enough finance to complete the purchase and could suffer serious consequences for default.

Guarantees can be complex documents which are difficult for a layperson to understand. You should get legal advice if you are asked to sign a guarantee. If you don’t understand anything ask your lawyer to explain it to you. You might also need to obtain advice from an accountant regarding the borrower’s financial position.

 

Some things to be aware of:

  • 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 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. 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.