Going Guarantor? Six questions to ask before you sign to be a guarantor
It is now a common requirement of lenders that a guarantor receive independent legal advice on guarantee documents. The banks require a solicitor to sign a Legal Advice Certificate confirming the advice given. This certificate can form part of the guarantee or may be a separate document.
Before you agree to go guarantor it is important to remember that as guarantor you will be stepping into the shoes of the borrower in the event they are unable to satisfy the terms of the contract with the lender. Below are some questions that you may want to ask before you agree to be a guarantor:
- What is a Guarantee?
A guarantee is a promise by the guarantor to assume the debt obligation of a borrower if that borrower defaults under the terms of the loan contract. - Limited vs Unlimited guarantees?
A guarantee can be limited or unlimited in amount, meaning as a guarantor you can be liable for only a portion or all of the debt. You should discuss the type of guarantee you are capable of providing with the borrower. - What is an Indemnity?
An indemnity is obligation (that is usually in addition to the guarantee) where you are responsible for the losses incurred by the borrower. If the borrower defaults, the indemnity gives the lender the right to shift the loss it incurs onto you. - How do I know the Borrower can afford the Loan that I
am guaranteeing?
You will need to satisfy yourself that the borrower is able to meet the terms and conditions of the loan, including whether or not they have the ability to meet the required repayments. It may be that in addition to obtaining independent legal advice you also need independent financial advice (even if it is not a condition of the loan). To this extent HHG Legal Group can assist and refer you to accredited financial advisors. - Will I receive notice if the Borrower is in default
under the loan?
Depending on the terms of the loan agreement, as guarantor you may not be entitled to notice of the borrower's default. - Does the Bank have to take enforcement against the
borrower first to recover the debt before taking legal action
against me as guarantor?
NO. Generally, as a guarantor you will have no right to insist that the lender proceeds first against the borrower or enforce against the borrower's securities before enforcing the guarantee. This means that in the event the borrower defaults, your assets can be sold by the bank to repay the loan under the guarantee.
This certificate of independent legal advice essentially provides the bank with assurance that the Guarantee document has been executed by the guarantor willingly after having received independent legal advice on the full force and effect of the document. The legal advice guarantors receive prior to signing can be the most important piece of advice they ever receive.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
