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17 January 2018

Signing a Guarantee

During the application process for a loan, a lender will sometimes require a guarantee. The provider of a guarantee is called a guarantor.

Guarantees are a guarantor’s promise to repay a debt in the event of another person (“the borrower”) defaulting on their obligations. If you are thinking about entering into a guarantee, here are some important points to consider:

Feeling pressured?

Guarantees are complex documents that come in different written forms. They can be confusing documents that take time to fully understand.

There is often pressure placed on a guarantor to sign a guarantee quickly. This pressure can come from the lender or family members. Many people feel a sense of obligation to provide a guarantee for a family member. In general, the law accepts that parties should be able to determine for themselves whether the level of risk associated with guaranteeing a loan is acceptable to them. This is not always the case. Legal advice is thought to help reduce risk and is highly recommended.

What are the risks of signing a guarantee?

Providing a guarantee generally imposes significant and unavoidable risk on a guarantor. Guarantors sometimes risk losing their own assets if the borrower fails to meet their obligations and the guarantee is called in. Guarantors can be exposed to additional costs, such as the costs incurred by the lender in trying to recover the amount of the loan and further borrowings made by the borrower at a later stage. Before providing a guarantee it is important to consider limiting your exposure as much as possible.

What will happen if I sign the guarantee and the borrower fails to meet their obligations under the loan?

If the loan is for the purchase of a property there are certain legal obligations imposed on lenders that take a guarantee. Section 121 Property Law Act 2007 imposes an obligation on those lenders to serve a notice of default (“notice”) on all guarantors, if the lender knows the person’s name and address. The notice should contain, among other things, important information about the nature and extent of the default and what action is required to remedy it (if it can be remedied). In some situations, becoming aware that there is a problem early may provide guarantors with an opportunity to rectify the issue. A guarantor that is served with a notice may choose to protect their position by remedying the default on the loan or by repaying the loan in full. Often however, guarantors are not in a position to do so. Where lenders fail to serve a notice on a guarantor, they are not prevented from exercising their powers of sale or their right to take possession of any secured property.[1] A guarantor is only provided with a right to claim losses as a result of a lender’s failure to serve the notice.[2] If the guarantor chooses to claim any losses that have arisen, they must prove that those losses stem directly from the lender’s failure to serve the notice. This can become an expensive problem for a guarantor who has suffered a loss of their assets and is suffering financial hardship as a result.

Recent consumer credit law reforms provide protection to some guarantors through the regulation of lender conduct[3]. The Credit Contracts and Consumer Finance Act 2003 (“the Act”) stipulates that when certain criteria are met, a lender must “exercise the care, diligence, and skill of a responsible lender” at all times both before taking a guarantee and after it has been signed.[4]   

Comprehensive legal advice obtained prior to signing a guarantee is highly recommended to help reduce your risk. It is especially important to obtain legal advice if you are feeling pressured to sign a guarantee, or if you don’t understand what the guarantee means. If you are a guarantor that has been served a notice and you are not in a position to pay the default on the loan, or repay the loan in full, we recommend you contact a lawyer as soon as possible.

 

[1] Property Law Act 2007, s 121(2).

[2] Property Law Act 2007, s 121(3).

[3] Contracts and Consumer Finance Act 2003, Part 1A.

[4] Credit Contracts and Consumer Finance Act 2003, s 9C(2)(a). 

 

The above information is of a general nature only. You should contact our firm for advice relating to your specific circumstance.

 

Kelly Lopas

About Kelly Lopas

Kelly joined Saunders Robinson Brown in 2017. She provides legal support to our litigation team.

View all posts by Kelly Lopas