Managing Liabilities: Risk and Your Spouse In Business
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Articles by Matthew Gilligan
As a structuring adviser to investors and business people, one very common mistake with many business and property structures is a spouse being offered as a guarantor to the banks, landlords or creditors of a business.
Their personal guarantee is often not required to get a deal done, yet it is provided because the advisors around you do not stand up for you and say 'hey, don't let your spouse sign that - you don't need to'. The result is that if total business or investment failure occurs, both spouses are fully liable instead of just one.
Of course the creditor, banker or landlord requesting your spouses guarantee will insist it is necessary 100%, because it is in their interest.
But it is contrary to your interests.
My advice is NEVER give your spouse's guarantee in business or property dealings if you can avoid it. I have developed over 80 million dollars in property, and guaranteed numerous business and banking obligations, purchased multiple investment properties - and my wife has never signed a personal guarantee on the loans.
Why? To shelter her from the obligations.
How did I avoid her being liable? By saying no to the banks and creditors when they asked. Did it hamstring her legal or matrimonial rights to recover the property if we divorced? No, she still gets the assets because she jointly controls the trusts and various entities borrowing. So this is not about stripping power off your spouse and potentially wealth; it is purely about minimising risk to your household.
Examples of this include:
-
Borrowing money from the bank to purchase an investment property or even your home. If one spouse is a homemaker, has no income or their income is not required to meet debt servicing criteria of the bank, then why allow the bank to take their guarantee? The only use of the guarantee will be to apply more pressure to your family if you have a problem, and both spouses go bankrupt instead of one (which could be viewed as malicious in this light).
One point to note here is that you may need to use a mortgage broker to manage the negotiation with the bank, and the broker will have to work a bit harder to achieve this. If you deal with a bank direct, they will likely tell you 'no spouse guarantee is impossible in your circumstances'. It may be true if your borrowing position is not strong, but how do you know unless you have a lot of banking and commercial experience?
The answer is use a broker who has the experience, and who is willing to try hard for you. I have found many brokers lazy, or unsophisticated - they are just not equipped for these sorts of discussions with bankers, or do not value asset protection concepts. Remember they get paid on commission, and asking for tough things from the bank means more work and time for the broker, with no more money. For this reason it may be appropriate to pay your broker to deal with the complexities, if your affairs are complex. Otherwise they may put you in the 'too hard' basket. If you need a good broker, email us at info@gra.co.nz . We have contacts all over the country, and for the record, we do not get commission from these relationships. We just want our clients better protected. -
Dealing with landlords over commercial leases and guarantees. Always try to divide leases out into separate 'tenancy companies' and make one spouse a director of this company. Your opening position should be no personal guarantee, and if 'no personal guarantee' is a deal-breaker with the landlord, then only the director/one spouse gives a guarantee. Try not to give an unlimited guarantee; limit it to say 6 months' rent, or a fixed sum as a cap.
For example, my rent is around $260,000 per annum for our premises, on a 3+3. If I guarantee it for an unlimited amount, that is a $780,000 personal obligation. Firstly, I limited the guarantee to 6 months' rent ($120,000) and secondly, made sure that the shareholders (a trust) and my spouse did not guarantee the loan. This turns a potentially disastrous obligation into a manageable commercial obligation. -
Dealing with creditors over personal guarantees. Creditors in business will generally ask for a personal guarantee. Refuse to give it if you can get away with it, and most of the time you can. Where you have to give one, just as with a landlord, 'limit the guarantee'. Only this week I was arranging some advertising with Fairfax, and they asked me for two GRA directors' personal guarantees over the obligations of our supply relationship with them for advertising. I was so annoyed, I told the salesman I did not wish to advertise with Fairfax if a personal guarantee was required. I told him clearly his company's view was that my company was unreliable in character, if they were not willing to deal with the company without the directors' guarantee.
He got the message - I really cared more about the guarantees than the advertising and they would not get our money unless they backed away from the guarantees. He rang later to advise the guarantees would not be necessary. To my knowledge, GRA directors have not guaranteed a single supplier obligation (apart from the limited guarantee to the landlord). So it can be done, but I do acknowledge that some suppliers just won't deal with you without providing a personal guarantee.
Summary
Keep your spouse out of the liability chain if you can. Personal guarantees and spouses should not mix.
If you are dealing with a landlord or creditor in business and have to provide a guarantee, try not to give a guarantee at all, or limit the guarantee to a fixed sum, e.g. 6 months' rent.
If your spouse has no income, you should be able to avoid their guarantee being given to the bank. Consider using a mortgage broker to achieve this. Generally the banks (if dealing direct) will be very hard to manage on this point, especially in this recessionary environment.
I hope you have found this information helpful. If you require assistance with any financial matters, please fell free to request an interview. We are here to help.
Have a good month!
Matthew Gilligan
Director
© Gilligan Rowe & Associates LP
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Disclaimer: This article is intended to provide only a summary of the issues associated with the topics covered. It does not purport to be comprehensive nor to provide specific advice. No person should act in reliance on any statement contained within this article without first obtaining specific professional advice. If you require any further information or advice on any matter covered within this article, please contact the author.
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