Page 47 - Q&A

Personal surety under the spotlight
with Covid-19

June 2020
“A year or two ago I asked my sister to stand as surety for me so I could buy a
house for my family. I had a good job and felt comfortable in asking her to do
so. She agreed and signed a surety agreement with the bank. With Covid-19 I’ve
now lost my job and despite getting payment holidays from the bank, I’m not
sure I will be able to make my mortgage instalments. Where does this leave my
sister? Will the bank now expect her to repay my outstanding mortgage loan?” Commercial

To answer your question, it is probably appropriate to explain what a personal
surety is. Typically, when a bank lends money to someone, they do so with the
expectation of receiving their capital and interest back on the loan amount
advanced. This means they need to be sure that instalments will be repaid
and that there is security in place should this not happen. Enter the surety
agreement, which banks often require persons to sign in their personal capacity
to stand surety for a debt. This may be the same person or another person
providing surety for the person borrowing the money (“principal debtor”) from
the bank (“creditor”).
What such a surety means is that you as “surety”, in your personal capacity,
promise to repay the debt and interest incurred by the principal debtor, on behalf
of the principal debtor, in the event that they do not meet their obligations.
The result is that if the principal debtor is unable to repay his debt, the surety can
be held legally liable to repay the capital loan amount that was advanced and
any interest incurred thereon.

So, must the bank first try and recover the debt from the principal debtor, by for
example repossessing the house? This would be the general rule that would
be applied in terms of our common law, but in most cases surety agreements
specifically stipulate that the surety binds herself “as surety and co-principal
debtor”. If this is the case, the creditor will be able to hold the surety liable for
the principal debtor’s debt from the get-go should the principal debtor default
on payment, and need not first attempt to recover the outstanding debt
from the principal debtor, including taking drastic steps such as repossessing
their assets should they not be able to pay or take over the obligations of the
principal debtor.
To answer your question, depending on the wording of your sister’s surety
agreement, there is a strong likelihood that the bank will require your sister to
stand in for your debt should you fail to make payments on your mortgage
loan. Our advice is to obtain legal advice to assess the terms of the surety
agreement and your sister’s risk should you fail to make payments. This will allow
you to assess how to best address the situation at hand.

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