Autumn 2013 Newsletter

Guarantees

Acting as a guarantor for someone, often in respect of payment of money, means that you agree to meet their obligations if they do not. Guarantee clauses are common in leases, hire purchase agreements, and in general dealings with a bank. There are potential pit-falls for you to consider when agreeing to be a guarantor.

Signing a Guarantee

A guarantee agreement must be in writing and must be signed by the guarantor. It is advisable that if a party is signing in another capacity as well, that they sign the contract twice, once in their capacity as borrower (e.g. as a director of a borrowing company), and once as a guarantor.

Types of Guarantees

There are many different types of guarantees, varying from a specific guarantee to cover a particular transaction, a continuing guarantee limited to a fixed amount through to a continuing guarantee where the guarantor agrees to meet all obligations of the other party. Many guarantee documents include both a guarantee and an indemnity, which means that not only is the guarantor guaranteeing the obligations will be met, they agree to protect the receiver of the guarantee from any harm or loss.

In most contracts where there is more than one guarantor, they are treated as being “jointly and severally liable”. This means the creditor can choose to pursue whomever they like to recover the debt. Even if you are only one guarantor amongst many, you may find yourself held liable for all of the debt. In this case you may have a right to compensation from co-guarantors, but enforcing this right can be a lengthy and costly process.

Rights and Obligations of the Guarantor

As a guarantor who has been called upon by a creditor to pay a debt, you have a right to require repayment by the original debtor. Of course in practice, this right may not amount to much protection as often the creditor is enforcing the guarantee due to the inability of the debtor to make a payment. A guarantor can however use the securities available to the original creditor. In other words, if a debt secured by a mortgage is paid in full by a guarantor, the guarantor is entitled to take over that mortgage security.

Independent Legal Advice

Creditors rely on a guarantor making an informed decision. To ensure their guarantee is enforceable creditors should disclose to the guarantor information about the obligations they are guaranteeing and be satisfied that the guarantor appreciates the risk they are assuming. The Code of Banking Practice goes further, by requiring that prospective guarantors be advised to seek independent legal advice. The party providing legal advice is then required to confirm the guarantor understood the obligation they were assuming at the time they entered the guarantee.

Diligence Required

If you decide to act as a guarantor for someone, including close friends and family, you should familiarise yourself with their financial position, read the contract very carefully and obtain legal advice to determine what your liability might be. Everyone is naturally optimistic when it comes to their family and friends, but it is vital to be aware of the risk you are assuming and make an informed decision.

Other Options

Entering into a guarantee for someone else’s bank loan (for example providing a guarantee for your son or daughter’s loan) is often a very risky way of achieving you objective. This is because the banks will often request that you give an all obligations guarantee, meaning that you will be liable for all existing and future borrowing of your son/daughter, until you withdraw the guarantee and even then you will be liable for all borrowing up until that point. However there are options available to you.
These include:

If you are looking at entering into a guarantee, call us to advise you on the pitfalls and options available to you – Louise Smith 09 407 0175, or Graeme McLelland 09 407 0179.

For Richer, For Poorer – Contracting Out of the Property Relationships Act 1976

The Property Relationships Act 1976 (‘the Act’) applies to all relationships including marriages, de facto relationships and same sex relationships.

The defining feature of the Act is that it provides for the equal sharing of the assets and liabilities of the relationship irrespective of the differing financial contributions of either partner throughout the relationship. In many cases this includes situations where one party may have brought significantly more assets into the relationship than the other.
The equal sharing provisions of the Act apply to all relationships exceeding three years duration.

Parties may enter into an agreement to contract out of the equal sharing provisions of the Act (“Contracting Out Agreement”). In order for a Contracting Out Agreement to be enforceable, it must be in writing. Each of the partners must also have obtained legal advice before signing the Contracting Out Agreement. Each lawyer must also sign, certifying that they have provided independent legal advice and witnessed their client’s execution of the document.

Contracting Out of the Act becomes especially important when there is a disparity in the financial positions of the partners. This disparity in the financial positions of the parties arises where one party brings greater net assets into the relationship than the other.

In the absence of a properly signed Contracting Out Agreement the equal sharing provisions of the Act will apply. In the event that the partners separate without entering into a Contracting Out Agreement the effect can be a net transfer of assets from the wealthier partner to the less well off partner.  This can be particularly upsetting for the wealthier partner if that separation occurs close to retirement age where there is limited opportunity to recover financially.

The impact of the equal sharing provisions on the wealthier partner is magnified if that person has the misfortune of experiencing two or more separations without protecting their interests by entering into a Contracting Out Agreement. This can have the effect of halving that person’s net worth each time they separate from a three year relationship.

Inheritances and gifts are generally considered to be the separate property of the partner to whom the gift or inheritance was given. However, when for example this gift or inheritance is applied to repay the loan for the family home and the partners go on to separate, the non inheriting partner is entitled to benefit from half of the inheritance applied to reduce the borrowing for the family.

Assets in a Family Trust are not necessarily protected from potential relationship property claims. In circumstances where the Family Trust was settled during the course of the relationship or where relationship property has been applied to sustain trust assets, the Trust can become tainted as relationship property. This most commonly occurs when the income of one or both partners is used to meet the loan obligations for property owned by the Trust.

A Contracting Out Agreement is fundamental for anyone in a relationship wishing to secure their assets, especially a partner entering into a second or subsequent relationship, or where there is a significant disparity in wealth at the outset of the relationship.

We consider a properly drafted and advised upon Contracting Out Agreement to be a valuable asset protection mechanism, protecting against a significant and common threat.

Contact Sarah Jury on 09 407 0176 to discuss how a Contracting Out Agreement can help protect your assets.

Snippets

New Faces

We are please to welcome Maree Walthall and Eimear Nelley at reception after saying goodbye to Odette Colebrook, who has left us to study at university. Find us on Facebook to learn a bit more about our staff members (hint: Maree is originally from the UK and into motorbikes and Eimear is an Irish-qualified solicitor who has played rugby for the Irish Women’s rugby team),
Kerikeri High School student Aimee Page has also joined us, helping out after school.

Plunket

We are excited to be working with Kerikeri Plunket to provide sponsorship and help to this organisation that is so relevant and helpful to our staff, clients and their families. We will be providing more details of this in the coming months – stay tuned on Facebook.

All information in this newsletter is to the best of the authors’ knowledge true and accurate. No liability is assumed by the authors, or publishers for any losses suffered by any person relying directly or indirectly upon this newsletter. It is recommended that clients should consult a senior representative of the firm before acting upon this information.

If you enjoyed this post, please consider to leave a comment or subscribe to the feed and get future articles delivered to your feed reader.

Comments

No comments yet.

Leave a comment

(required)

(required)


McLeods Lawyers — 21 Hobson Avenue, Kerikeri, Bay of Islands, New Zealand — Phone +64 9 407 0170 — Email law@mcleods.co.nz

The information on this site is not comprehensive legal advice. Please contact us for advice and information suited to your needs.