Tuesday, 13 March 2012

Mortgagee Beware: When Guarantors Do Not Guarantee

In common parlance, "guarantor" (or co-signor) denotes someone who will share a responsibility for a mortgage or a loan.  However, as explained in Kalsi v. Achary, 2012 BCSC 361, merely calling yourself or someone else a "guarantor" in a legal document may not be enough to impose any obligations.

The facts of the case were simple.  The Defendants co-signed a mortgage granted by their friend to the Plaintiff as "guarantors".  However, the mortgage contained no guarantee terms and, when the friend defaulted, the Defendants refused to live up to the alleged "guarantee". As set out below, the court agreed with their position, finding that there was no meeting of minds on their obligations.

Standard mortgage terms, which were incorporated by reference into this mortgage under s. 225 of the Land Title Act and checking off the appropriate box on Form B, include provisions binding a "covenantor", if any.  However, notwithstanding the little practical difference between a "covenantor" and "guarantor", they are legally distinct concepts and there was no basis to conclude that the Defendants signed in the former capacity:
[27]    ... there is a fundamental difference between being a covenantor and a guarantor.  A guarantor’s liability is secondary to that of the party whose obligation he is guaranteeing; a covenator’s liability is primary.  ... The fact that in many circumstances there might not be a practical difference between the two does not detract from the necessity to spell the obligation out clearly in an agreement.

[28]    Did the [Defendants] sign as covenantors?  I do not see how I can come to that conclusion.  They are designated as “guarantors” and nowhere as covenantors.  If there is any ambiguity which would allow me to address the surrounding circumstances of the arrangement, I do not think those circumstances are clear enough to solve the ambiguity when no one addressed their minds to the issue.
The mere fact that the Defendants signed as guarantors (placing that moniker beside their signatures) was also not sufficient to conclude that they granted a "bare" guarantee.  Disposing of this argument, the court relied on the BCCA decision in Times Square v. Shimizu, which held that "guarantees come in all shapes and sizes" and a "standard clause" cannot be simply implied in the absence of evidence regarding a custom or practice in the specific field where the parties operate. In this case, with the uncertainty of whether the Defendants were even intended to be guarantors or covenantors, no obligation could be implied. Accordingly, the Defendants were off scot-free.

For those in real-estate practice, of particular importance may be the closing words of the judgment:
[31]    In the case at bar, the parties were even further from an agreement than the parties in Times Square, because it cannot be said which obligation – guarantor or covenantor – the parties intended the Acharys to assume.  As in Times Square, it was for Mr. Kalsi’s lawyer to properly specify those obligations.

Mortgagee, or their lawyer, beware!