Suretyships: Friend or Foe?
A suretyship can be a blessing or a nightmare, depending on what side of the suretyship coin you are on.
A deed of suretyship is a good idea to include in, for instance, a commercial lease agreement, credit application, or loan agreement, as it effectively doubles the chances of a creditor to recover its debts, should the need ever arise. Here are some things to consider:
You may be approached by a friend, family member, colleague or business associate to sign as surety for them. This favour can help them to finally rent their own accommodation, or start their own business, but what are the risks for you? Too often, people sign as surety for others and often forget about it until a creditor comes knocking. You may want to consider what this means and the effects it may have on you before signing on that dotted line:
The basics
- A suretyship is a form of security wherein one person (the surety) guarantees and binds themselves for the debt and obligations of another (the principal debtor) in favour of a creditor.
- It creates a personal obligation on the part of the surety, where the surety is bound jointly and severally with the principal debtor. This means that the creditor can proceed against the surety and/or the principal debtor for the same debt and they are both equally responsible for the debt until it is paid.
A deed of suretyship is a good idea to include in, for instance, a commercial lease agreement, credit application, or loan agreement, as it effectively doubles the chances of a creditor to recover its debts, should the need ever arise. Here are some things to consider:
- What is the creditworthiness and financial position of the surety?
- Is your suretyship drafted and executed properly?
- There specific and strict requirements for a deed of suretyship to be valid!
- Does it cover all eventualities: eg, Business rescue? Sequestration?
- It is a good idea to consult an attorney to draft or to review your suretyship. Many companies use invalid suretyships for years unknowingly, so it is best to ensure that your interests are protected.
You may be approached by a friend, family member, colleague or business associate to sign as surety for them. This favour can help them to finally rent their own accommodation, or start their own business, but what are the risks for you? Too often, people sign as surety for others and often forget about it until a creditor comes knocking. You may want to consider what this means and the effects it may have on you before signing on that dotted line:
- What is the principal debtor’s financial position?
- Does the principal debtor have a good track record of repayment and are they reasonably capable of meeting their financial commitments to which you are standing surety?
- How well do you know the person who you are standing as surety for?
- Why does the person need a surety?
- What are the implications for my spouse if I am married in community of property and wish to sign as surety for another?
- Do I understand what I am signing?
- Courts will not easily discharge a surety’s obligations if they claim that they did not understand what they were signing. If the suretyship complies with the requirements, it should be clear what it is you are signing and you are obligated.
- If you are unsure, it is wise to get a legal professional to review or explain the consequences of a suretyship to you.