Danger of breaching duties
When you buy a house in your own name, and you need a loan to do it, you will be the borrower, the owner and the security provider (mortgagor).
In some situations, these are different people. For example, the owners might be the trustees of a trust, but the borrower is an individual. There are good reasons for this sort of structure, particularly from a relationship property or creditor protection perspective. This does, however, make things complicated from the lender’s perspective, and can sometimes cause them to inadvertently ask trustees to breach their duties, as this article will explore.
Borrowing vs security
Whoever buys a property, be that you or your partner, a company or the trustees of a trust, as the owners you are the only ones who can give the lender a mortgage. The reason is that you cannot grant a mortgage, which is a type of security that is registered against a title to ‘real property’ (another word for land or ‘bricks and mortar’) unless you are named on the record of title as the owner or owners of the property.
There are a number of reasons why the borrower (person borrowing the money from the lender) and the security provider (person giving a mortgage or a guarantee) might not be the same person:
- For asset protection purposes you will usually be the borrower, while the trustees will provide a mortgage by way of security, and there will be a guarantee linking them together (sometimes called an ‘interlocking guarantee’)
- If a child is borrowing money to buy a house and their income is deemed insufficient to service a mortgage, a parent might guarantee their lending, or
- If a company borrows 100% of the purchase price of a property, the shareholders (and sometimes the director/s), will be required to sign a guarantee (and often mortgage security over another property as well).
Trustee duties
When trustees are asked to provide security, whether in the form of a mortgage, a guarantee (or both), they must be mindful of their duties to all of the beneficiaries of a trust. These include duties:
- To invest prudently, and in doing so must exercise the care and skill that a prudent person of business would exercise in managing the affairs of others2
- Not to bind or commit trustees to future exercise of discretion.3 They may, for example, be called on to honour the guarantee in the future by paying the beneficiary’s lending, and
- To be impartial as between the beneficiaries.4 Will giving the guarantee be unfairly partial to one beneficiary if the trustees cannot do the same for another?
Trustees also have an overarching duty of care which encapsulates hundreds of years of case law5 which makes it clear the trustees’ duty is to hold or deal with trust property for the benefit of the beneficiaries as a whole.
Unlimited guarantees
An unlimited guarantee states that the guarantor is liable for all amounts the borrower owes, however much that is, until every cent owing has been repaid, or the guarantor is released from their obligations.
As an example, if a beneficiary of a trust borrows $750,000 to buy their first home, and the trustees of the trust sign an unlimited guarantee, the trustees’ liability can extend to:
- The $750,000 loan
- The borrower’s car loan they take out a year later
- The new loan for renovations taken out three years after that, and/or
- The borrower’s credit card debt.
This could breach a number of the trustees’ duties
Best practice
Trustees should not sign an unlimited guarantee without first considering their duties to all the beneficiaries. In many cases, consideration of their duties will lead trustees to realise that it would be more prudent to sign a limited guarantee.
While all the major lenders are familiar with and will grant a limited guarantee, they will issue an unlimited guarantee by default unless you ask specifically.
If you think that as a trustee you will be asked to guarantee a beneficiary’s lending, make sure you ask for that to be a limited guarantee.
2 Section 30, Trusts Act 2019.
3 Section 33.
4 Section 35.
5 Section 29.
DISCLAIMER: All the information published in Trust eSpeaking is true and accurate to the best of the authors’ knowledge. It should not be a substitute for legal advice. No liability is assumed by the authors or publisher for losses suffered by any person or organisation relying directly or indirectly on this newsletter. Views expressed are those of individual authors, and do not necessarily reflect the view of this firm. Articles appearing in Trust eSpeaking may be reproduced with prior approval from the editor and credit given to the source.
© NZ LAW Limited, 2025. Editor: Adrienne Olsen, Adroite Communications. E: adrienne@adroite.co.nz. M: 029 286 3650.