RK have recently become aware of an article making some questionable claims about third party guarantees in residential aged care.
Although they are rarely enforced, guarantees are useful because they can help providers recover the fees from the person managing the resident’s money. In an industry where it can be very difficult and costly to recover fees from a resident, guarantees provide some protection to providers.
Claim that guarantees would be “unenforceable”
The article claims that:
There is a significant body of law relating to guarantees which require a guarantor to have received independent legal advice prior to executing a guarantee….In our view, it is unlikely the guarantees will be enforceable.
We strongly disagree.
What the “body of law” says is that people must not act unconscionably and that in some cases, relying on a guarantee is unconscionable. Applying this, courts have set aside guarantees given to banks because the guarantor was unknowingly duped into signing because of their relationship with the borrower. Examples include:
- a case involving elderly immigrant parents who gave a guarantee for their son’s business debts without understanding what this meant.
- cases involving wives who were pressured by their husbands into signing guarantees for the purposes of lending money to the husband’s business.
Making sure the guarantor has received independent advice is a way of protecting lenders from having guarantees set aside. Banks, being risk averse, have developed a practice requiring all third party guarantors to seek legal advice.
However there is no law that says a guarantee is unenforceable simply because the guarantor hasn’t received such advice. Further, there is no basis for concluding that a court would find that an aged care provider who failed to insist, or even suggest, a guarantor seek independent advice could not enforce the guarantee.
Importantly, there are some very big differences between the guarantees that are used in aged care cases and the guarantees in the cases that the courts have looked at.
- First are the different relationships involved. In aged care, guarantees are typically given by adult children. This is different to the cases in which guarantees were provided by elderly, immigrant parents or wives who had signed without understanding what it meant. In those cases, the important factor was the emotional dependence that these people had on the borrower and the pressure that the borrower put on them to sign.
- It is also important that amounts of money secured are very different to the bank cases. The bank cases typically involve a borrower who borrows tens of thousands, if not hundreds of thousands of dollars for a business venture. The amounts aged care providers are seeking to secure through guarantees are amounts that the Government has deemed the resident can pay. There shouldn’t be any reason for the resident not to pay the fees so there is no reason why the provider should ever need to sue the guarantor.
Because of this, the risks associated with giving a guarantee in aged care are much lower than in the bank guarantee cases.
- Finally, there is the practical reality in aged care that the person giving the guarantee is often the same person who is responsible for managing the resident's finances. Universally, in the cases of bad debts that we see, it is poor management on the part of the children looking after the resident’s money that results in the resident’s fees and payments going into arrears. This is very different to a case where a wife guarantees her husband’s business debts and has limited influence over what her husband does within the business.
These things make it very unlikely that an aged care guarantee would be unenforceable simply because the guarantor didn’t get advice.
We disagree with the conclusion of the recent article that “the requirement for guarantees in aged care should cease”.
The article makes the unsubstantiated assertion that “the level of bad debts is generally very low” in aged care. This claim is certainly not consistent with our experience and it is well-known that one of consequences of the reforms is that the level of bad debts will rise.
Further, the level of debt is irrelevant. Aged care is a unique industry. Unlike other businesses, residential aged care providers are legally obligated by law to provide high levels of care and services to their clients regardless of whether or not the fees are actually paid. Unlike other businesses, aged care providers cannot build in contingencies to their fees to protect themselves against bad debts. Further, because of security of tenure provisions, residential aged care providers have limited ability to minimise their losses. Where bad debts do arise, it can be very difficult and costly for providers to recover these.
In conclusion, we certainly would not advise providers to stop asking for guarantees. They are more important than ever in the increasingly regulated and tightly funded aged care environment. Also, questions the about whether or not a particular guarantee is enforceable are mostly theoretical. This would only ever be an issue in the unlikely event that the provider actually seeks to sue the guarantor.
Certainly, giving guarantors the opportunity to seek advice is prudent and this is one of the reasons we recommend giving the resident agreement to the prospective resident prior to entry. However, there is no obligation for aged care providers to “insist” on third party guarantors seeking independent advice.
No one can ever be forced to sign a guarantee. However, it is perfectly legitimate for an approved provider to refuse entry to a resident without a guarantee. Where a family member refuses to provide a guarantee, this should raise serious concerns in the provider’s mind. Ultimately, there should never be a need for a guarantee because there is no legitimate reason why a resident shouldn’t pay. So you have to ask, what is the problem?