In adulthood, we will be exposed to sureties in one form or another. Whether this requires a partner, spouse, or parent to stand surety to qualify for a home loan or, standing surety for a facility granted to a company. Occasionally, surety just forms part of a contract, a loan, or an instalment finance agreement which one enters.
All should be fair and well, as long as the person or company that stood surety meets their obligations but according to Tess Rodrigues, the managing member of mortgage originating company Property Factor, the guarantor is occasionally unexpectedly called upon to fulfil the terms of the suretyship when they were under the impression that it was no longer applicable.
Tess provides two real-life examples:
A parent stands surety for his son’s home loan
Mr Jones Junior* wanted to purchase a property in 1985. He had applied for a home loan at the National Building Society* and Mr Jones Senior* stood R100 000 limited surety for Mr Jones Junior* to quality for the home loan.
Three years down the line, the property was sold, and the home loan was 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 It was assumed that because the home loan was repaid, the suretyship was no longer applicable.
In 1995, the National Building Society* was liquidated and its debtors’ book, together with all applicable securities, was sold to Prosperity Bank*.
Some years later, Mr Jones Junior* purchased another property and he required a small home loan of R300 000 from Prosperity Bank*. There was no issue of affordability at the time and Mr Jones Junior* was immediately granted the required home loan. Unfortunately, in 2005, Mr Jones Junior faced serious financial difficulties and he 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 Senior in 1985 in favour of the National Building Society which was bought over by Prosperity Bank. They immediately sent a letter of demand to Mr Jones Senior 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 outstanding balance.
Mr Jones Senior, a successful businessman with numerous business and personal accounts at Prosperity Bank, refused to pay the R100 000. He believed the property provided sufficient security and he had no recollection of ever standing surety for Mr Jones Junior at Prosperity Bank.
Mr Jones Senior only became aware that the bank had frozen all his accounts when he needed to pay staff salaries at the end of that week. He was left with no alternative but to pay the R100 000.
“This true story happened in South Africa with one of our local financial institutions” says Tess. “It is important to note that when you stand surety for somebody, the surety is not limited to a transaction, but it applies to all debt incurred by that debtor at the financial institution. While the surety agreement differs from bank to bank, most make provision for it to be on-sold or even ceded.”
A director stands surety for a real estate agency sold
Mr Smith* was a director of XYZ Homes (Pty) Ltd*. The real estate agency has 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 ten years previously.
Tess provides five ways to ensure that you are not caught unaware:
- 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 them.
- Never stand guarantee for anyone 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, a R100 000 guarantee on a home loan account with the number 345 12366* over a 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 do not 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” concludes Tess.
*Individual, company and financial institutions names have been changed to protect their identity.