Mortgages and Guarantees

Contributed by SigourneyDrane and current to 27 July 2018

Mortgages

A mortgage is a contract between a creditor (mortgagee) and a debtor (mortgagor) which secures obligations under a credit contract or related guarantee, whether or not it also secures other obligations.

The mortgagor may be a natural person or a strata corporation (see sections 7 and 41 of the NCC).

A mortgage must be in the form of a written mortgage document and signed by the mortgagor. It is sufficient if the mortgage is contained in credit contract signed by the mortgagor or if one of the documents comprising the mortgage document is signed by the mortgagor (see section 42 of the NCC).

Note that a goods mortgage need not be in the form of a written mortgage document if the credit provider lawfully had possession of the goods the subject of the mortgage before the mortgage was entered into (see section 42 of the NCC).

If a mortgage is in the form of a written mortgage document and is not part of a credit contract, the credit provider must give the mortgagor a copy to keep within 14 days after it is made (see section 43 of the NCC).

A mortgage that does not describe or identify the property which is subject to the mortgage is void (see section 44 of the NCC).

A provision in a mortgage to the effect that the mortgagor creates or agrees to create a mortgage over or in respect of property or a class of property that is to be, or may be, acquired by the mortgagor after the mortgage is entered into is void (see section 45 of the NCC).

Guarantees

A guarantee is a contract between a creditor and a guarantor to the extent to which it guarantees obligations under credit contract, whether or not it also secures other obligations.

The guarantor may be a natural person or a strata corporation (see sections 8 and 54 of the NCC).

A guarantee is security for the performance of the borrower's obligations under the credit contract whereby the guarantor agrees with the creditor to pay the debt if the borrower is unable to pay.

A creditor may require additional security by way of guarantee if it believes there is a risk that the borrower may not be able to meet its obligations under the credit contract.

A guarantor may also be required to provide security for their obligations by way of a mortgage over an asset owned by the guarantor. If the borrower does not meet its obligations under the credit contract then the creditor may sell the guarantor's asset to recover the debt owed by the borrower.

A guarantee must in writing and signed by the guarantor. It is sufficient if the guarantee is contained in a mortgage signed by the guarantor (see section 55 of the NCC).

Before a guarantee is signed by the guarantor, the credit provider must give the prospective guarantor (see section 56 of the NCC):

• a copy of the contract document of the credit contract or proposed credit contract; and
• a document in the form prescribed by the Regulations explaining the rights and obligations of a guarantor.

A guarantor may withdraw from the guarantee by written notice to the credit provider (see section 58 of the NCC):

• at any time before credit is first provided under the credit contact; or
• where credit has been provided, if the credit contract made differs in some material respect from the proposed credit contract given to the guarantor before the guarantee is signed.

A guarantee may provide that the guarantor guarantees the debtor's obligations under a particular credit contract and also all obligations arising between that particular debtor and credit provider (see section 59 of the NCC).

Such obligations may not only be those obligations existing at the time the guarantee is signed, but may include future obligations arising under a future credit contract.

The guarantee will only be enforceable in relation to a future credit contract if the credit provider has given the guarantor a copy of the future credit contract and a written acceptance of the extension of the guarantee from the guarantor.

A guarantor's obligations under a guarantee can be increased (see section 61 of the NCC).

For example, the credit contract may allow the debtor and credit provider to agree to change the contract by providing further amounts of credit under that credit contract to the debtor. Any increase in liability will have no effect unless:

• the credit provider provides the guarantor with a written notice setting out the particulars of the change in the terms of the credit contract that will allow an increase in the guarantor's liabilities; and
• the credit provider subsequently obtains from the guarantor an acceptance of the extension of the guarantee to that increased liability.