It is important to note that when you stand surety for somebody, the surety is not limited to a transaction, but applies to all the debt incurred by that debtor at that financial institution.
At some stage in any adult’s life, they will be exposed to sureties in one form or another. Be it needing a partner, spouse or parent to stand surety in order to qualify for a home loan or standing surety for a facility granted to a company that one owns. And occasionally the surety just forms part of a contract, loan or instalment finance agreement that one enters into.
As long as the person or company that one stood surety for is meeting with their obligations, all is fair and well, but sometimes the guarantor is unexpectedly called upon to fulfill the terms of the suretyship when they were under the impression that it was no longer applicable. To illustrate, property finance specialists Property Factor have shared these real-life scenarios.
Parent Stood Guarantee for Son’s Home Loan
Back in 1985, Mr Jones Jr* wanted to purchase a property. He had applied for a home loan at National Building Society* and Mr Jones Sr* stood R100 000 limited surety in order for Junior to qualify for such home loan. Some 3 years later, the property was sold and the home loan fully repaid. However, the surety agreement was never explicitly cancelled. It was assumed that because the home loan was repaid, the suretyship was no longer applicable. That would make sense, wouldn’t it? But no…
Around 1995, National Building Society was liquidated and its debtors book, together with all the applicable securities, was sold to Prosperity Bank.
Some years later, Mr Jones Jr purchased another property and required a small home loan of R300,000 from Prosperity Bank. There was no issue of affordability at the time and Mr Jones Jr was immediately granted the required home loan. Unfortunately, in 2005 Mr Jones Jr faced serious financial difficulties and was declared insolvent.
Prosperity Bank applied to have the property sold in execution. In the interim, they came upon the guarantee signed by Mr Jones Sr back in 1985 in favour of National Building Society, which was bought over by Prosperity Bank. They immediately sent a letter of demand to Mr Jones Sr demanding the R100 000, even though the market value of the property to be sold in execution was well in excess of R2 million and the home loan had a mere R265,000 balance outstanding.
Mr Jones Sr, a very successful businessman with numerous business and personal accounts at Prosperity Bank, refused to pay the R100 000, as in his opinion the property provided sufficient security and he had no recollection of ever standing surety for Mr Jones Jr at Prosperity Bank. Mr Jones Sr only became aware that the bank had frozen all his accounts when he needed to pay staff salaries at the end of that week. Mr Jones Sr was left with no alternative but to pay the R100 000.
You may think that this is a farfetched story, but it isn’t!
It happened right here in our own country with one of our financial institutions. It is important to note that when you stand surety for somebody, the surety is not limited to a transaction, but applies to all the debt incurred by that debtor at that financial institution. Furthermore, while the surety agreement differs from bank to bank, most make provision for it to be on-sold or even ceded.
Director Stood Surety for Real Estate Agency Sold
Mr Smith* was a director of XYZ Homes (Pty) Ltd*. The agency had applied for a credit facility for which Mr Smith stood R300,000 limited surety.
Years later XYZ Homes (Pty) Ltd was sold to another conglomerate as an ongoing concern. The business was not transferred out of the existing registered company, but its shares were taken over by the new owners and the directors substituted accordingly. Mr Smith failed to explicitly cancel the personal surety stood for the agency at the bank.
In 2003, XYZ Homes (Pty) Ltd was liquidated and Mr Smith received a letter of demand for the R300,000 in terms of the surety, even though he had sold his interests in the business 10 years previously.
Ensure that you are not caught unawares when you stand surety by guarding against the following:
When signing any agreement, be it for a cell phone or an instalment finance transaction, look out for personal surety clauses and where possible delete then.
- Never stand guarantee for anybody whose debt behaviour you are not familiar with.
- Limit your guarantee. Most certainly in terms of the amount and where possible, limit it to a specific transaction. For example, R100 000 guarantee on home loan account number 34512366 over property known as Erf 23, 5 Richter Close, Cape Town. Be specific and leave no room for doubt or ambiguity.
- When buying or selling an ongoing concern or a property in an entity, always ensure that the sale is a transfer to a newly registered entity with a separate registration number and not just merely the transfer of shares.
- Keep a surety register so that you know all the sureties you have signed and when you should cancel them. When cancelling a surety make sure that the bank hands the document back to you so that you can destroy it. Never assume that it gets cancelled automatically.
"To get what we want and to improve our living conditions, we need to step out of our comfort zone, but we don’t need to do so recklessly. Sureties are at times a necessary evil. We can and should, however, limit our exposure to this potential financial risk," says Property Factor's Tess Rodrigues.
Disclosure part of due diligence for banks
According to Nedbank, "Suretyships are largely developed in the ‘commercial’ space, so customers are more aware of the implications. Individual surety in favour of another individual is not as common but is mostly standard for student loans (in this case the loan is directed to the student but based on the parent’s affordability".
Bankers are required go through the documents with customers, as per our due diligence process.
Nedbank outlined how its sureties are drawn up and treated as follows:
Relationship of sureties - Mainly, that they are not limited to the transaction, but include the whole relationship with a bank. For example, a client may think that they are standing surety for one particular transaction (e.g. a home loan), but in fact they are standing surety for the entire debt of that debtor with the bank, be it an overdraft facility, personal loan, credit card facility, or the home loan etc.
The are two issues at hand here are “unlimited sureties” and “not limited to the transaction”. Nedbank only requests limited suretyships as individuals need to pass a National Credit Act affordability test and juristic entities need to pass a solvency and liquidity test (neither of which are possible with an ‘unlimited’ value). Our suretyship document is clear that the surety is for an amount (obligation) and not product specific.
Ceding of debtors - When a bank sells or cedes their debtors book to another financial institution, it includes all the security attached to such debt. For example, a client stood surety for a home loan at one financial institution, but that financial institution sold/ceded its home loan book to another bank, the surety now stands surety for the debtor at the new bank and is liable to the new bank even though it never engaged with such bank.
Nedbank’s suretyship document is clear in this regard. It clearly states that we have the right to cede, assign and transfer our rights. We have the right at any given time and from time to time, without the client’s consent, to cede, assign and transfer all or any of its rights, title and interest in and to this suretyship. This also includes any other security of whatever nature held by Nedbank in respect of the indebtedness of the principal debtor to and in favour of any third party or parties, whether natural, juristic or of any other kind or nature. If the bank cedes its surety to another entity, then the surety will be limited to the exposure that was ceded and will not include any other exposure which the debtor might have with the cessionary.
Unlimited sureties must be cancelled - Sureties have an unlimited/infinite lifespan, unless they are expressly cancelled and destroyed.
Our suretyship document does state the terms for cancellation. The client acknowledges that he/she may only be released from his obligations upon written notice from him/her to Nedbank or from his executors, trustees or other legal representatives, as the case may be, requesting Nedbank to release him from this suretyship, provided that such termination shall only come into effect upon receipt by the client of a written notice from Nedbank acknowledging that this suretyship has been terminated. And when that part of the client’s obligation already due or accruing at the date of receipt of such notice, together with interest and costs thereon, has been paid. If a debtor wishes to be released form his/her/its suretyship then alternative surety will need to be provided by the debtor if the debt has not been settled.
Don't remain liable - The client which stood surety for an entity will remain liable for the entity's debt, irrespective if the entity was sold to another, but retained its registration name and number. Unless obviously, such surety was expressly cancelled.
A juristic is a separate legal entity. A change of its shareholders/members does not affect any liability owed by the company. The person providing surety does so in favour of the obligations of the legal entity and not the underlying shareholders/members. Usually, if there is a change in ownership, the bank will be consulted to update signatories and collateral, but the reality is that sureties in favour of juristic entities are in most cases provided by the directors/shareholders/members of the entity. They are therefore privileged to any “sale” of the entity.
*Article sourced from Property 24*
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