Don’t get Caught Out with Limited Guarantees…

A couple bought a rental property in the name of a company they had set up.  They signed paperwork with their bank and lawyer to purchase the property.  Years later, the company wanted to borrow more money to undertake some renovations on the property.  The bank sent a “limited guarantee” to them for signing.

They saw their lawyer to take advice about the guarantee.  Their lawyer advised them that the guarantee was limited to a certain amount of borrowings ($500,000), meaning they were only personally liable for the company’s borrowings up to that amount, plus interest and costs. 

It later transpired that they had already signed another ‘limited’ guarantee in the past for an amount of $250,000, and that the previous guarantee was not being released upon signing the new guarantee.  Both guarantees would then be in place at the same time. 

The couple had forgotten about the earlier guarantee as they signed it with the bank and waived the right to legal advice at the time.  This meant that the total amount they had agreed to guarantee was much more than they thought - $750,000.

Guarantees are very important documents, hence the requirement to obtain independent legal advice about them (advice from a lawyer who is independent from the borrower).

When you sign a guarantee, you are agreeing that you will stand in the shoes of the borrower, for example if they default on payment of the loan. 

Limited guarantees, like the above, limit your liability to a certain amount (usually plus interest and costs).  Unlimited guarantees, on the other hand, have no limit and instead mean you are guaranteeing all current and future lending of the borrower.

Although limited guarantees are generally a ‘safer’ option for guarantors (as they can know the limit of their obligations), you need to be careful to enquire into any existing guarantees you may have in place and whether any new guarantee replaces previous guarantees or applies alongside it.  It is vital that you know the total amount you are guaranteeing.

We recommend that you contact your legal advisor before signing any guarantee.