Chris Fick & Associates

CF_April Surety B“Buy land – they’ve stopped making it” (Mark Twain)
Property can indeed be a great investment, just be aware that signing personal suretyship – which you will almost certainly have to do if you buy property in a company or trust with money borrowed from a bank – carries risks that you can and should actively manage. Whilst the bank’s first line of security will be a bond over the property, its second will be you personally as surety.And several recent court decisions illustrate just one of the dangers that you face – sale of the property under value.
Sale under valueTake this scenario – the company’s property is worth more than the bondholder’s claim, so you sleep soundly in the belief that your personal assets aren’t ever going to be at risk. But things go wrong and the property is sold for less than its true value. You are duly sued by the bondholder for its shortfall.Can you escape your suretyship obligations if it is the bondholder that is responsible for the sale below value? The answer is yes – but only if you can prove that the property was indeed sold under value, that the bondholder prejudiced you by selling at that value, and that you didn’t contractually accept that risk.So you are at risk if…..

  • If it wasn’t the bondholder who controlled the sale, but someone else.

Thus in one recent case, Mr. A as director of a company arranged a sale of its property for R3,3m, leaving the bondholder bank with a R2.5m shortfall for which it sued Mr. B as surety. B’s defence was that A had only been authorised to sell for no less than R3,85m, and that the sale at R3,3m was unlawful and well below market value – to B’s prejudice. Irrelevant, held the Court – even if the sale was at less than the minimum price authorised, that was a matter between A and B, it had no relevance to the bank’s claim. B had to pay under his suretyship.

In two other cases, the property-holding company had been liquidated, and the sales effected by the liquidators, not by the bondholders. In one case, a property allegedly worth R65m was sold for R30m, and the surety ended up having to pay the bank its R40m shortfall. In the other case, a property allegedly worth R15m was sold for R6.8m, leaving the surety liable for R7.2m. In both cases, the bondholder could not be held liable for the sale by the liquidator, the Court in the one matter specifically declining to find on the facts that the bank had “controlled and dictated the terms of the sale agreement.”

  • If it wasn’t the bondholder who controlled the sale, but someone else.
This wasn’t a critical issue in any of the cases in question, but it probably isn’t going to be easy to show that a theoretical valuation should trump the actual sale price – “market value” at the end of the day is what a willing buyer will pay to a willing seller.
  • If the terms of your suretyship are such that you accepted the risk of a sale under value.

You are bound by the terms of what you sign. In one of the above cases the terms of the suretyship covered the bank regardless of “any negligence or breach of contract on the part of the Bank or the debtor, or the non¬-notification to the surety of any default, delay, omission or contractual breach on the part of the Debtor”. Whilst the Court confirmed that “fairness and good faith are considerations which are deeply embedded in our law of contract”, if the prejudice complained of results from the bank acting in accordance with the terms of the loan agreement and the suretyship, then that is prejudice which the surety “undertook to suffer”.

Take advice upfront

By all means invest in property through a company, but be aware of the risks associated with signing surety, and manage them at all times – in particular seek legal assistance before signing anything, and again at the first sign of trouble in your company or trust.

© DotNews, 2005-2013. This newsletter is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice.