GUARANTEES: Security for lenders

Posted on October 13th, 2009

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Published by Law Society of New South Wales

In a recent case, the court of appeal considered a case where a mortgage was varied, lengthening the term, increasing the principal and raising the interest rate, after the guarantors had resigned as directors of the company which had taken out the mortgage. The lender, who suffered a shortfall on the sale of the security, sought to recover from the guarantors.

The court concluded that the variations altered the nature of the guarantors’ obligations. By reason of the increase, the guarantors would have been exposed to a potentially greater risk of being called upon to meet a default by the company of its obligations under the mortgage, “even if their liability was limited to the original sum lent to the  company ($240,000) plus interest”.

The increased borrowing by the company may have made it more likely that the company would default and that the guarantors would be required to meet any shortfall, even if only up to a limit of $240,000.

The lender failed to recover from the guarantors – a salutary lesson that gaurantees must be tightly drafted to ensure they are not affected by later variations. Your solicitor can advise you on the appropriate wording for such  guarantees.

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