A question has been raised on a file about whether a security over real property that was granted to (allegedly) support a guarantee is effective when no guarantee was given at the time.
Here are the facts:
Mr S was not in a great financial position. In June 2006 he borrowed some money from a relative. Not a large amount, but enough to cause the lender to reduce the loan to writing. The relative agreed to lend the money as long as the Mr S’s mother agreed to guarantee the loan.
The written loan agreement between Mr S and his relative stated that the mother would do so, but the mother was not a party to the agreement and there is no indication that she knew about the loan at this time. The loan agreement went on to say that the mother would guarantee the loan only if she was granted a charge over Mr S’s house. (The bank had taken possession of the house at this stage, but there was plenty of equity). The agreement ended with Mr S ostensibly granting a charge to his mother. The money was lent.
At this time there was no guarantee and no mention that the mother was involved or even agreed to provide a guarantee.
In August 2006 (two months later) Mr S became bankrupt and two Brisbane partners became the trustees. Still no guarantee had been executed.
Two more months later, in October 2006, the bank settled the sale of the property. We received the equity in the property. At that time we had not received any notice of the charge, the loan or the prospect of a guarantee. In fact, as it turned out, the guarantee still had not been signed. It was signed in November 2006.
This raises the question of whether the original charge valid is as no consideration was given at the time the charge was created (June 2006)?
We believe not. If the consideration was given within a reasonable time of the transaction, if even if there was an acknowledgement by the mother that the guarantee would be given, it could be argued that the guarantee was given in consideration of the charge. But due to the length of time, the bankruptcy and the sale of the property, that nexus would be lost.
It is important that consideration is given at the time of, or within a reasonable time of, a transaction. Without that consideration the transaction, in this case the granting of a security, may be ineffective.