Jul 23, 2021
THE NEW REALITY: PRIVATE MORTGAGE DEFAULTS - POWER OF SALE & FORECLOSURE - Part LII of a Series - Personal Guarantees part 3
In the previous Post XLI I continued the discussion regarding personal guarantees sometimes found in mortgages. I explained that if a mortgagor needs to be given a notice or needs to sign a renewal or other document, then most certainly the guarantor also needs to be given the same notice and needs to sign the same renewal or other document.
In this post, I want explain, if I may, why bank standard form guarantees are so long (often 5 pages of micro-type). The answer starts with the understanding that the English court of equity (now the Ontario Superior Court – see post X) has long favoured giving extra protection to guarantors. While the courts are quick to give judgment to a lender/mortgagee against a borrower/owner/mortgagor, the courts are much slower to give judgment against a guarantor. And the courts will only do so if it is fair to award judgment against the guarantor (unlike the borrowers who simply have to repay the debt as agreed to – at least in most circumstances).
Why? Because unlike the borrower/owner/mortgagor who actually gets the benefit of the loan proceeds paid to her or to him, the guarantor gets nothing in return for her or his promise to pay the debt if the borrower fails to do so. So, the courts examine more closely the relationship between lender and guarantor and lean towards the side of the guarantor:
- if there is any evidence that the guarantor was under any undue influence
- if there was an inequality of bargaining power between the lender and the guarantor
- if there was any inducement for the guarantor to give the guarantee that proves to have been false or misleading
- if the loan was in any way amended without the guarantor’s consent including if the term of the loan was renewed or extended in any way without the guarantor’s signature.
This list is not complete, as there are other factors that the courts will consider when analyzing the enforceability of a guarantee. Almost every clause in those long winded standard form bank guarantees is included in the guarantee contract to help the lender enforce the guarantee. Over the centuries of interpreting guarantees, as the courts have found one reason after another to not enforce the guarantee against the guarantor, the banks add another clause in the guarantee contract to make the guarantee enforceable even if that same event or circumstance happens again. And so, the bank’s guarantee document is very long indeed.
Next blog will look at independent legal advice in the context of guarantees. And as always, this blog is intended for information purposes only. It is not legal advice and cannot be relied on as such. Nor is it a substitute for hiring your own legal counsel, who will be an essential member of your mortgage default and power of sale team. And lastly, this blog is just my opinion. I reserve the right to change my mind. And I reserve the right to be wrong.
Be well and stay healthy.