Why is it important to sign guarantees correctly?
Are you ready to go guarantor so your child can take out a mortgage to buy their first home?
Before you sign on the dotted line, have you taken into account your obligations as a guarantor, and how your guarantee might not be enforceable? Oh.
In this blog, we explain how guarantees work, and when they might not be enforceable.
What is a guarantee?
A guarantee is a promise made by a guarantor to a lender to fulfill the borrower’s obligations (i.e. make mortgage repayments), should the borrower fail to do so.
When are guarantees used?
Here are situations where guarantees are typically used:
A company requires a business loan. A company director personally guarantees that the company will repay the loan in accordance with the loan agreement.
A parent provides a guarantee for their child’s mortgage to assist them to purchase a property.
A subsidiary company asks its parent company for a guarantee to meet its debts.
How does a guarantee work?
In the event that a borrower does not repay the loan, the lender chases the guarantor for payment.
I’ve made a guarantee. Can I get out of it?
A guarantor is only able to wiggle out of a guarantee if:
the lender approves the borrower’s request to remove the guarantor;
a lender releases the borrower; or
the loan is paid in full.
When might a guarantee not be enforceable?
A court may say that a guarantee is not enforceable if there is:
Misleading and deceptive conduct. For instance, a guarantor asks a lender about the cost to get out of the loan, and the lender gives a false explanation.
A failure to disclose. It is crucial that all parties to a transaction provide adequate disclosure. If a guarantor asks a lender a question about the loan agreement and the lender does not answer, this could result in the guarantee not being enforceable.
Duress or undue influence. Duress is when someone is pressured by another person to make a decision that they would not otherwise make. Undue influence is when a person takes advantage of their special relationship with another party (i.e spouse, family member) for their own gain.
An example of duress and undue influence in the context of guarantees is when a husband pressures his wife to act as guarantor over a property without providing her with full disclosure about the transaction, and giving her the benefit of independent legal advice.
Unconscionable conduct. This could occur when guarantees are not properly explained to people who are blind, minors, illiterate and/or disabled.
Evidence that the guarantee is illegal. If the document goes against public policy or the law, a court is likely to find it unenforceable.
Consent has not been provided by the guarantor. For a guarantee to stand up in court, it is critical that the person who signed the guarantee gave their consent. A person is not able to give their consent in circumstances where they cannot read or understand the document because they are blind or illiterate.
Evidence that the guarantee has not been executed correctly. We often hear cases where someone other than the guarantor signs the guarantee. They do this so they can say that they never signed the guarantee, and escape their obligations. Moral of the story? Take your guarantee and loan documentation to a lawyer, and ensure that they have been signed and witnessed correctly.
Better yet, have the documents executed in front of a lawyer. The solicitor will meticulously review whether the documents have been signed and witnessed properly, and compare the signatures on the documents against previous signatures, and the guarantor’s identification.
Wrap-up
Deciding to become a guarantor is no joke. It is important that you obtain legal advice so you fully understand the obligations of a guarantor, and the implications of not executing a guarantee correctly.
If you elect not to obtain legal advice, you risk serious legal and financial consequences, and being liable for repaying the loan if the borrower defaults.