We recently dealt with a guarantee that was being given by our client’s in their capacity as trustees of a discretionary trust.
There is a small clause in the guarantee that makes them personally liable under the guarantee, not just the trust:
“You declare that you are not signing this guarantee and indemnity as a trustee of any trust or settlement, unless you have told us otherwise in writing. If you do enter into this guarantee and indemnity as a trustee of a trust, this guarantee and indemnity binds you personally and in your capacity as trustee of the trust.”
If there is a default, the Bank can sue them personally, and any mortgage held by the bank over property held in their own names would be further security for their obligations as guarantors. While the bank needs to pursue the borrower first, under the National Credit Code, after that, the trustees are fair game, and the bank may go after them before any of the other guarantors, if they appeared to have more readily available funds, or realisable assets.
Secondly, the terms were misleading because they did not confirm that the guarantees could withdraw the guarantee at any time prior to the credit being provided, which they could do in this situation, pursuant to section 58 of the National Credit Code:
Guarantor may withdraw before credit is provided
(1) Although a guarantee has been made, the guarantor may nevertheless, by written notice to the credit provider:
(a) withdraw from the guarantee at any time before credit is first provided under the credit contact; or
(b) withdraw from the guarantee after credit is first provided under the contract if the credit contract made differs in some material respect from
the proposed credit contract given to the guarantor before the guarantee is signed.
(2) The guarantor may withdraw from a guarantee under this section to the extent only that it guarantees obligations under the credit contract.
(3) This section is subject to section 61.
The client was considering options to withdraw from the sale contract. When we were consulted, the loan money had not been advance to the borrower. One option was to withdraw the guarantee, on the basis that they had not been told that they were going to be personally liable, and then seek a letter from the bank stating that it is not prepared to lend the money without that personal guarantee. This would have been a Non Approval Notice for the purpose of the standard REIWA/Law Society Joint Form Terms and Conditions of Sale, which is used in most land sales in WA.
They could then truthfully advise the seller that:
- their bank would only grant the loan if they both provided personal guarantees;
- it was a trust, not them personally that was named as the guarantor;
- their personal liability was in the fine print;
- they thought it was only two trusts that would be liable; and
- in the current climate of uncertainty, they were not prepared to provide personal guarantees.
They could then negotiate with the bank and the seller for a better deal, or pull out altogether.
While it may still have been possible for the seller to argue that the trustees are personally liable for the sale falling over, we could not think of any good arguments to make them liable, if we were acting for the seller.
We also noted that, if the seller threatened to take action, our clients could then negotiate a settlement of the dispute, after hearing the seller’s arguments, and the seller would almost certainly agree to let the sale proceed, so they should be in no worse a position, except perhaps in relation to some default interest.
With a $1.5m property in issue, that interest might be high, but a waiver could probably have been negotiated.
In the end, the client decided to proceed with the purchase anyway, so it all became academic.
For someone who properly reads the fine print and related legislation in your guarantees– contact Michael Paterson & Associates