This article was prepared for Irwin Legal by Mr Anthony Aristei.
In a mortgage dispute, the mortgagee (on the one hand) and the mortgagor (on the other hand) are in conflict. Their dispute is adversarial in nature. Unfortunately, there is a “winner takes all” aspect to the dispute if it has to be determined by a Court of Law.
The mortgagee is either a bank, a financier or some other form of lender. Their aim is to recover their loan monies (and interest) from a defaulting mortgagor.
The mortgagor may be an individual, a couple, or a company that has borrowed money from a lender. The original loan may have been for the purpose of buying a home, an investment property, or the purchase of a business. Subsequent loans may have also been obtained in order to provide additional finance for similar purposes.
However, there is another type of mortgagor who seem to attract the interest of the Courts in an inordinate number of cases. They are the guarantors - persons or companies who have agreed to be legally liable if the borrower defaults in the repayment of the loan.
In practice, the ordinary form of guarantee is given by the securing of a mortgage against the guarantor's property. As a result, the mortgagee lender can sell the guarantor's property if the borrower defaults on his or her loan.
This may seem inherently unfair as the guarantor did not borrow the money in the first place. Nor was the loan monies used to buy the guarantor's property. But if the guarantor has singed the mortgage, he or she is legally bound in ordinary circumstances.
One might ask why the lender doesn't simply sell the property which the borrower had originally bought with the loan monies? Why does the lender decide to sell up the guarantor's property instead?
Unfortunately, there is no simple answer to these questions. For example, the original borrower might now be bankrupt. Or the borrower's property might not have enough equity to cover the outstanding loan.
But the law is clear. A guarantor attracts personal legal liability if he or she has knowingly agreed to sign a mortgage security against their property for the benefit of a third person.
Although there are always exceptions to every rule of law, defences to mortgages or guarantees are not common, and usually require intensive analysis. (We will examine a number of the major defences in this series).
In the event of the borrower's default in the repayment of a loan, the guarantor can be called upon to indemnify the lender's losses.
The ordinary remedy sought by the lender is to take possession of the guarantor's property. Once the property is repossessed, the property is then sold in order to recover the debt owed.
You may well ask what sort of person would willingly offer up their hard-earned property as “security” for a loan by another? Who would risk the loss of their home in order to help someone else to buy their own property?
The answer is FAMILY members!!
In a recent sample of well-known cases in this area of law, the guarantors were found to be family members in a significant portion of them. Generally, the guarantors were either brothers, sisters, or parents of the borrowers.
In the next blog in this series, a number of these cases will be examined.