Whenever an agreement (i.e. leases, property purchase contract, mortgages or guarantees) is made, you may come across either the term joint and/or several.
What does it actually mean?
Joint liability – two or more persons both agree that they will be responsible to comply with all terms of an agreement, whether one takes all the liability or the liability is shared.
Bob and Sam own a business (70/30 ownership split). They decide to rent a retail space and enter into a fixed term 1-year lease as joint tenants with rental payable in the sum of $30,000.00.
Irrespective of what Bob and Sam’s arrangement is (70/30), if rent is not paid, the Landlord may pursue one or both for any rental owing.
Note: Landlord cannot double dip, if $20,000 of rent is owing, the Landlord can seek to recover on either of the following:
· $20,000 from Bob only; or
· $10,000 from Bob and $10,000 from Sam; or any range and calculation where for example
· $1,000 from Bob and $19,000 from Sam.
The amount payable by Bob and Sam do not need to be in any type of planned calculation.
Several liability – two or more person agree that they will be responsible for their share of their obligations under the terms of the agreement.
Bob and Sam run a business. They both enter into a 1 year fixed term lease on a split (70/30 in Bob’s favour) as tenants in common for the rental of the leased premises in the sum of $30,000.00. On this arrangement, Sam is only liable for 30% ($9,000.00) of the total rent payable for the 1-year term, while Bob is liable for $21,000 representing the 70% of the entire lease payment.
Note: A blanket approach should not be applied for several liability as there are many factors (special circumstances) that may apply which permits the Landlord to pursue Sam for more than his share (30%) of the rent.
Sam enters into a loan agreement with Company A for the obtainment of $100,000 (the Loan). Sam is required to repay the Loan in full plus $20,000 in interest within 6 months of the draw down of the principal loan monies (Total sum repayable $120,000).
Due to Sam’s poor credit history and owning assets worth $80,000 only as security for the loan monies, Company A required Sam’s wealthy brother Bob to co-borrow in the agreement (joint liability). Bob was under the impression that Company A must recover from Sam first (the asset of $80,000) and the balance ($40,000) from Bob should something go wrong with Sam, and Sam cannot repay the loan monies and interest.
There were no further separate agreements between Bob and Sam.
Result: Company A proceeds to recover the full $120,000 from Bob and Bob has no action against Sam.
In short, before entering any form of agreement which attracts a liability or onus to repay monies where a partner or joint borrower is involved, we strongly recommend that you should seek legal advice to ensure that you fully understand the effects the joint and several liability held within that agreement will have on you.
Article written by Ting Wei Hu of our Brisbane office.