Risks of going guarantor: should you do it?


Risks of going guarantor

It’s a common scenario: a friend or family member is taking out a loan and the lender (a bank or a private lender) wants a guarantee that they will repay. Your friend or relative asks if you will ‘go guarantor’ for them. They promise that it’s just a formality and they’re ‘good’ for the loan and you won’t be left out of pocket. You might feel obliged to help them out, especially if you care a lot about this person. But should you do it?

In this blog post, we discuss some of the risks and potential pitfalls of being a guarantor, and what you should do if you are considering signing a guarantee for a loan.

Knowing the conditions of the guarantee is crucial

As a first point of call, you should know exactly what you are guaranteeing. Some important questions to ask are:

  • Are you guaranteeing the whole loan amount?
  • How much is the loan amount?
  • Are you the only guarantor or are there others?
  • Can the borrower increase the loan amount that you guarantee without you knowing or authorising?
  • When will the lender pursue you? Is there a certain amount of repayments that the borrower must miss before it is considered a default and the lender comes after the guarantor?
  • How is the guarantee enforced? Lenders may register a mortgage over your property. If you already have a mortgage, this may be registered as a second-ranking (second priority) mortgage.

Guarantee documents can be confusing and quite legalistic.

If someone has asked you to be their guarantor, it is crucial that you seek legal advice.

At David Davis, we regularly deal with guarantees. We can advise you on your obligations under the guarantee and make sure that you understand exactly what you’re signing. Importantly, however, we can not provide you with financial advice. For instance, we cannot advise you on the providence of the loan and whether the borrower will be able to meet his or her obligations to the lender.

Solicitor’s certificate

Some lenders, particularly banks, also require a solicitor’s certificate for a guarantee.

A solicitor’s certificate is signed by a lawyer to certify that you fully understand the terms and conditions of what you are signing, and the repercussions should the borrower default. It is important that a solicitor has the opportunity to review all the necessary documents in advance and to speak with you to ensure your full understanding.

It is also critical that the borrower does not attend with you to see your lawyer who is advising you on your obligations under the guarantee and then providing you with a solicitor’s certificate. This is to ensure that the proposed guarantor receives independent advice and can ask questions of the solicitor without feeling any pressure from the borrower.

If you have been asked to provide a solicitor’s certificate, please contact us to discuss how we can help you – 03 9014 1299.

Do not sign any documentation without legal advice

Obtaining legal advice before signing any documentation will help you to ensure that no one is ‘pulling the wool over your eyes’ or taking advantage of you in the guarantee process.

Unfortunately, there have been several cases in Australia where a borrower has taken advantage of a spouse, a parent, a business partner or someone else close to them to secure a loan.

Garcia v National Australia Bank (1998) 155 ALR 614

In this case, Mrs Garcia signed several guarantees for loans taken out by her husband, secured by way of a mortgage over her and her husband’s matrimonial home.

Mrs Garcia did not understand that the guarantees were secured by a mortgage and that she could lose her home if her husband defaulted on the loan. Her husband also made several promises to her that there was no danger that he would default.

The parties subsequently divorced and Mrs Garcia sought to have the guarantee declared void. The matter was argued through various courts and eventually ended up in the High Court.

The High Court held that the guarantee was not binding on Mrs Garcia because of an old rule known as ‘wife’s special equity’. This rule was used to determine that it would be unconscionable to hold Mrs Garcia to the guarantee where her husband had misled her, and where she was entitled to trust him because they were married.

While this was a good result for Mrs Garcia, the case illustrates the importance of understanding what you are signing and obtaining proper, professional advice, rather than trusting the borrower – no matter how close your relationship.

National Australia Bank Ltd v John Albert Rose [2016] VSCA 169

This more recent case involved two business partners, John Rose and Timothy Rice.

Mr Rose and Mr Rice took out loans from NAB to finance the purchase of investment properties on the Gold Coast. Mr Rice organised for Mr Rose to personally guarantee these loans without telling Mr Rose.

When NAB’s business banking manager came to Mr Rose’s house to sign the documents, Mr Rose signed the documents without reading them or seeking legal or financial advice.

When Mr Rose and Mr Rice’s company defaulted on the loans and NAB pursued Mr Rose for over $3.8 million.

In this case, the Court found NAB at fault, as the bank manager had failed to give Mr Rose proper notice of what he was signing and failed to recommend that Mr Rose obtain legal or financial advice.

Banks are required to give these types of warnings for guarantees under the Code of Banking Practice. Other lenders, however, may not be bound by such requirements. This case illustrates the importance of properly reading any documentation given to you before signing a guarantee, and of obtaining proper legal advice about your obligations.

Financial advice

Finally, you should seek financial advice as to how your guarantee may impact your finances, including any effect on your future borrowing ability and whether you can truly afford to be a guarantor.

Lawyers can’t provide this type of advice but we can refer you to a financial advisor if needed.

Have you been asked to ‘go guarantor’ for a friend, loved one or business associate? Contact us today to arrange an appointment with a member of our friendly, experienced team.

Contact David Davis Commercial Lawyers

Phone: 03 9014 1299

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