Guarantors play a crucial role in securing loans or leases in the real estate and finance industry. However, the legal obligations of a guarantor can become complex when the borrower or the tenant is a minor. This article aims to shed light on the legal implications of guaranteeing a minor in the real estate and finance sector.
The issue of whether a guarantor is entitled to seek an indemnity from a minor on whose behalf they made a guarantee is a complex legal question that has long been debated in legal circles. The basic principle that underpins this issue is that a minor, due to their age, is generally not held legally responsible for their actions in the same way that an adult is. However, the question remains: Should a guarantor be excused from their obligation simply because the person they guaranteed for is a minor?
First, it is important to note that the law generally considers guarantees to be binding contracts that create a legal obligation on the part of the guarantor to pay the creditor if the debtor defaults. In most cases, a guarantee is given to a creditor to provide security for a loan or credit facility that has been extended to the debtor. This means that the guarantor assumes a certain degree of risk in agreeing to act as a guarantor, as they are essentially agreeing to pay the creditor if the debtor cannot.
In the case of a minor, however, the law takes a different approach. Due to their status as minors, they are generally not considered to have the capacity to enter into legally binding contracts. This means that any contract entered into by a minor is considered to be voidable, meaning that they can choose to either affirm or disaffirm the contract when they reach the age of majority.
The Infants Relief Act, of 1874 provides legal protection to infants by invalidating certain contracts they enter into. It also provides a shield against legal action to individuals for debts incurred during their infancy, unless they ratify or promise to pay after turning 18. However, as per Section 5 of the Betting and Loans (Infants) Act 1892, any fresh promises made after reaching the age of majority for void loans, and any negotiable instruments issued for such loans, are completely void. These statutes, though enacted in England, for part of our law by dint of section 3(c)(1) of the Judicature Act. The Age of Majority Act, CAP. 33 of 1974 sets the age of majority in the following terms: A person shall be of full age and cease to be under any disability by reason of age on attaining the age of eighteen years.
In addition, minors cannot open bank accounts on their own, as banks can only open accounts for individuals capable of entering into a valid contract. However, a minor can open a bank account jointly with a parent or legal guardian who will act as the primary account holder. Guideline 5.6.5 of the Central Bank of Kenya Prudential Guidelines, 2013 outlines the necessary customer due diligence measures that banks must undertake before entering into any contractual agreements with their clients.
According to these guidelines, there are specific requirements for opening a bank account for minors, which include providing proof of nationality and date of birth through a birth certificate and, the identity documents of the minor’s legal parent or guardian. In the case of an adoptive parent or guardian, certified copies of the Adoptive Order or Guardianship Order are also required. The bank may also take measures to verify the identity of the minor and their parent or guardian, such as verifying their address and source of income.
If an account is opened on behalf of a minor through a court order, the court will designate the person to open and operate the account on behalf of the minor and specify the purpose of the account and how it should be operated. For instance, there have been decided cases where a minor successfully sued for compensation and the court directed that the damages awarded should be deposited in a joint bank account operated by the minor’s legal guardian and the Deputy Registrar of the High Court.
So, what does this mean for a guarantor who has guaranteed a loan or credit facility for a minor? In most cases, the guarantor would still be held liable for the debt, regardless of the minor’s status. This is because the guarantor’s obligation arises from the contract between themselves and the creditor, rather than the contract between the creditor and the minor.
In other words, the guarantor assumes the risk of the minor’s potential inability to fulfil their obligations under the contract, and must therefore fulfil their obligations under the contract by paying the creditor if necessary.
The Children Act, 2022 holds the parent or guardian of a child liable for the acts of the child done in the course of a trade or business, to the same extent as the child would be liable as if they were of full age and capacity. In J M K v Housing Finance Company of Kenya Limited  eKLR, the plaintiff charged her land to secure a loan with a defendant, including a jointly owned property with two minors. The defendant collected rental income and the plaintiff did not deny owing the debt. The plaintiff sought a temporary injunction, but the court found no harm demonstrated and ruled the defendant’s power of sale was valid. The court determined as follows, “On the issue of the property being jointly owned with minors, I concur with the Defendant that by the Plaintiff executing the charge in her capacity as the next friend and trustee of the minors, she created a legally enforceable contract on their behalf. This position is articulated in the case of Halima Abdinoor Hassan & 3 others Vs Corporate Insurance Company Limited  eKLR where it was held that: ‘ …As a general rule, a minor may not have the legal capacity to enter into a contract unless through guardians and trustee…..’.”
In conclusion, while a minor’s status as a non-contracting party may create some complications in the context of a guarantee, it does not absolve the guarantor of their obligation to fulfil the terms of the guarantee. Guarantors should therefore carefully consider the risks involved before agreeing to act as a guarantor and ensure that they fully understand the implications of their obligations under the contract.
A guarantee in the real estate and finance sector involving minors requires a clear understanding of the legal obligations involved. Even though minors are not liable for contracts they enter into, some guarantee agreements may still hold the guarantor responsible. For instance, if a guarantor guarantees a lease for a minor tenant, they may be required to pay back the entire lease amount if the minor tenant defaults on their payments. This can be a considerable financial burden, especially if the lease is for an extended period or has a high rent. Similarly, if a guarantor guarantees a loan for a minor borrower, they may be required to pay back the entire loan if the borrower defaults on their payments. Therefore, guarantors should carefully read and understand the terms of the guarantee agreements before signing them to avoid any unforeseen financial liabilities.
By Cindy Terry