Welcome to part 3 on “What are my rights and duties as a guarantor?”. You can also read part one and part two.  Here we will be looking at whether or not a guarantee can be limited, how ‘all accounts’ guarantees differ from other guarantees, the difference between different types of guarantees, and what happens if the borrower defaults. The article will also touch on the rights of a guarantor and repercussions of failing to guarantee a loan, as well as any claim a guarantor may bring against the borrower.

Can a guarantee be limited in any way?

In short, yes you can.

If you wish to limit the amount for which the guarantee will provide, you must make this clear to the lender. You may also wish to limit the time for which the guarantee will be valid. Again, this will need to be communicated to your lender. While it is possible that the lender will agree to these conditions, it is also possible that the lender will refuse to proceed on this basis. At the end of the day, the lender is looking for someone to provide added security to the loan agreement, as the borrower was unable to do this alone. A limitation on the guarantee may result in the lender deciding to leave the negotiating table altogether.

At the very least, you should endeavour to have a lawyer limit the guarantee to the total amount being borrowed including interest and any costs for recovering the debt. In doing so, your lawyer should explicitly exclude from the guarantee any advances of money made after the amount that was initially loaned to the debtor.

Understanding an “all accounts” guarantee

This is an all-encompassing guarantee. It basically assures the lender that any money that is at any time owed by the debtor to the lender will be paid by the guarantor. It covers things like:

  • Any other loans undertaken, or guarantees given, by the borrower;
  • Credit card debts;
  • Bank account overdrafts;
  • Chattel leases; and
  • Any other monies owed by the borrower.

An “all accounts” guarantee includes any money that is owed at any time, which means it will include any further advances given by the creditor, even after the guarantee is first signed.

While it is always advisable to only guarantee the amount that is being borrowed (not including interest), the lender may feel as if the borrower, because of its various other loans, will not be able meet them.

You should try, whenever possible, to limit your guarantee to the particular amount that you have been asked to guarantee. Of course, the whole reason you are being asked to provide your guarantee may be because the lender feels that it is over-exposed to the debtor/borrower because of other loans. In that case, the lender may require an “all accounts” guarantee or refuse to loan the money to the debtor/borrower. It is worth noting that the guarantee will only be enforceable in relation to future loan agreements if the lender has provided the guarantor with a copy of the contract document of that loan agreement. The guarantor must then approve the extension of the guarantee (in writing) for it to be enforceable.

What happens if the borrower defaults on repayments?

Any failure to meet the repayment obligations of the borrower will be remedied by the guarantor, which might include the principal amount, any interest and default interest, as well as the any costs incurred by the lender in having the default remedied. If the lender wishes to do so, it may pursue the guarantor directly instead of going first to the defaulting borrower.

What happens if the guarantor cannot remedy the default?

This is not a great situation to be in as the guarantor. If, as the guarantor, you cannot meet any of the financial obligations flowing from the borrower’s default, you can be personally pursued by the lender for being unable to pay these costs. The lender may sell off your assets, and can use the proceeds to pay for the principal, interest and other costs. The lender may also use the proceeds to pay for the upkeep of any property, the sale of the property, and any legal fees incurred during the process.

Can the guarantor sue the borrower?

While the option of suing the borrower is technically available to you as the guarantor, the unfortunate reality is that if the borrower didn’t have money to pay back the lender, it is unlikely he or she will have money to pay you back either.

Conclusion

The moral of the story here is to make sure you understand your rights and obligations as a guarantor. Do not sign any credit contracts or loan agreements without first consulting a finance lawyer with experience in loan agreements. LegalVision has a team of finance lawyers that can provide a fixed-fee quote for advice.

To take advantage of your obligation-free consultation to discuss the rights of a guarantor, contact LegalVision on 1300 544 755.

Lachlan McKnight

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