What is a Guarantor Agreement?
A guarantor agreement is a legally binding document that is entered into by a guarantor (usually a parent or relative) and a tenant (usually their child or intimates) to underwrite their rental or tenancy commitments to a landlord. The purpose of this document is to secure the rental payment and/or other losses that may occur during the life of the tenancy. While many tenancy agreements will not require the tenant to provide a guarantor, it is relatively common for residential tenancy providers to require a guarantee.
While the scope of individual agreements will vary from case to case, it is primarily a means for a landlord to secure an obligation of personal performance on the part of a third party in respect of the obligations of the tenant .
Within a guarantor agreement, a landlord may seek to ensure that a third party (‘the guarantor’) covenants to guarantee that a prospective tenant (‘the tenant’) performs his or her obligations under a tenancy under which he or she is to lease real property (usually for commercial purposes).
The general intention is that the guarantor will secure obligations under a tenancy, but also that the liability of the guarantor will be principal and primarily so towards the landlord for any loss that the landlord may sustain as a result of a tenant’s failure to comply with their obligations.
Common situations where a landlord may require an individual to act as a guarantor include:
It is important to note, however, that with residential tenancy agreements it is unlawful for the landlord to require the tenant to obtain a guarantor as a pre-condition of entering into the tenancy.
Important Features of a Guarantor Agreement
The terms of a guarantor agreement will vary with the type of obligation that they are guaranteeing. In addition a guarantor cannot secure by a guarantor agreement against future liabilities. The independent value of the consideration given by or on behalf of the creditor in respect of the obligation is a necessary element to the enforceability of the agreement.
Usually the guarantor agreement will contain the following essential elements: (i) Statement of the express intention of the guarantor to enter into contract with the creditor to repay the debt, (ii) Statement of the consideration received, and (iii) The extent, nature, duration and limitations of the guarantor’s obligations. The obligation of the guarantor will generally be stated in the terms of an absolute undertaking to pay a sum of money to the creditor, but may be subject to conditions, stipulations, limitations and restrictions not only upon the nature of the debt itself but also on the amount and the time of repayment to the creditor. Nevertheless, a contract of guarantee where the guarantee is not given absolutely for the payment of the debt at a certain time but is conditional upon an event such as default of the principal debtor, is void unless such event is certain to infallibly happen owing to the nature of the contract between the creditor and principal debtor. The undertaking must promise to pay a debt which is in existence when the promise is made and not create an obligation to create a later debt. The undertaking of the guarantor may be expressed as having a limited duration only or a limit of liability in respect of the amount of the guarantee. A limit of time is commonly included where the debt is a commercial loan with a defined period of time for repayment. Where the debt is not subject to a time limit the court may impose a limit of time in which the creditor must sue the guarantor. It does not follow however that this limit will necessarily be of the length that the guarantor had in mind at the time the contract was made; the court will consider all the circumstances of the parties and the length of time which the creditor is likely to require credit for the loan to the debtor. With the exception of cases involving Guarantee Insurance Ltd v Reynolds the court will not award the creditor an extension of time unless the creditor can show that the extension was within the contemplation of the parties at the time of the agreement. The exceptions to this principle are where the term of the guarantee is expressed to run for a fixed period, the guarantee will continue until the expiration of that period. However the court will consider the relevant evidence submitted by the parties when the guarantor would be released from liability if one of the parties to the obligation dies. Apart from the parties and the debt, the other most important factor to be clearly stated in a guarantor agreement is the limits of the liability of the guarantor. The limits of the liability are the conditions which must be fulfilled before the creditor is entitled hold the guarantor liable. The agreement should make it clear whether the guarantor is meant to discharge the debt on the happening of any particular event or on the default of the debtor. It should also be made clear whether the guarantor has any further obligations in addition to paying the debt. Again the debtor will not be released from liability unless that event infallibly happens. If it is the intention of both the creditor and the guarantor that a charge be imposed upon a certain asset it should be made clear to the guarantor which asset will become the subject of the charge. A failure to do so may result in the charge being imposed earlier than intended when it can be discharged. The guarantor agreement should be signed by each separate guarantor and dated. The agreement is effective from the date of delivery of it to the creditor who may enforce its terms from that date. Any change to the terms of a guarantor agreement must be made by a deed and the guarantee must refer specifically to the alteration or be made in replacement of the existing deed. The creditor bears the onus of proof that the guarantor agreed to guarantee the obligation and the creditor may require the guarantor’s signature to be witnessed in order to evidence this.
Requirements and Considerations
To be enforceable, a guarantor agreement must be in writing and signed by the guarantor (s. 127(3) of the Companies Act). Both parties should also consider taking independent legal advice. Even if it’s not strictly necessary, if you’re a guarantor, you should definitely obtain independent legal advice. You need to understand fully just what the risks are of guaranteeing a company’s debts and also know what alternatives and limits you may wish to put in place as a guarantor. Also, any limitations on your liability should be in writing in the guarantor agreement. As with other agreements, in the event of any dispute, courts may be more likely to imply terms that reflect common commercial practice where an agreement is signed without independent legal advice.
Guarantor Agreement Sample Contract
SAMPLE GUARANTOR AGREEMENT
This Guarantor Agreement (this "Agreement") is made and entered into this ___ day of _____________, 20__ (the "Effective Date"), by and among ___________________________ (the "Guarantor"), ___________________________ (the "Landlord"), and __________________________ (the "Tenant").
RECITALS:
WHEREAS, the Tenant, the Landlord, and the Guarantor intend to enter into this Agreement in conjunction with the Lease Concerning _____________ (the "Lease") for the Premises located at ________________________, (the "Premises"), a copy of which is attached hereto as Exhibit A, and made a part hereof by this reference.
NOW, THEREFORE, the parties hereto agree as follows:
- Guaranty Forces Guarantor to Obey All of Tenant’s Obligations – The Guarantor hereby unconditionally and absolutely guarantees the above-described Lease and agrees to be personally liable for all of the Tenant’s obligations and liabilities under the Lease including all terms, provisions, burdens, covenants, conditions, warranties, representations, charges, interest and agreements on Tenant’s part in the Lease to be paid, observed and performed.
- Guarantor’s Obligation to Perform is Absolute – The Guarantor’s obligations under this Agreement and guaranty of the Lease shall be primary and unconditional and not contingent on the pursuit of any remedies against the Tenant or the availability of, or exhaustion of remedies against the Tenant.
- Guarantor Waives the Right to Non-Joinder – Guarantor waives any right to require the Landlord to proceed against Tenant or any other person or to exercise any right or remedy against Tenant, and Guarantor agrees that Guarantor shall be liable for all reasonable costs, expenses, and fees, including reasonable attorneys’ fees, incurred by the Landlord in enforcing its rights under this Agreement and the Lease.
- Additional Charge – In consideration for the guaranty provided by the Guarantor, the Tenant agrees to pay the Landlord an additional charge of $_____ payable ___________. This charge is due upon execution of this Agreement.
- Waiver and Release – The Guarantor hereby waives and relinquishes all right the Guarantor may have of recourse against the Tenant, and further waives all rights and remedies of the Guarantor against the Tenant, and any officer, partner, or member of the Tenant for all loss, injury, damage, claims, expenses, or liabilities the Tenant, any officer, partner or member thereof may suffer or sustain in connection with the premises, Leases, or any liabilities (including any attorneys’ fees as to claims involved in the Lease excluding any of the aforementioned rights or remedies relating to late fees, reimbursement of property taxes, or any other pass-throughs or rent increases), or in connection with the Guarantor’s liability hereunder except as to untruths or intentional misrepresentations of the Tenant.
- Termination of Agreement – Upon termination of the Lease and full compliance with all of the terms and conditions thereof by the Tenant, this Agreement will terminate and have no further force and effect.
- Binding Effect of this Agreement – This Agreement shall inure to and bind the benefit of the heirs, executors, personal representatives, successors, and assigns of all parties hereto. Any reference herein to any party hereto is deemed to refer to all persons or entities comprising such party whether singular, plural, or corporate. No change or modification in or departure from this Agreement shall be effective unless in writing and signed by all parties hereto.
Common Pitfalls
There are a number of common mistakes that parties make when drafting or signing guarantor agreements. First, the individual or entity that is the subject of the guarantee cannot be the same as the guarantor. If I am guaranteeing a debt of XYZ Corp., I can’t also be XYZ Corp. In that case, the underlying contract or lease may say that it is with me and not with XYZ Corp., which can cause problems.
While it is not a great time to draft a separate agreement for each guarantor, you want to be careful that you are not guaranteeing the whole debt yourself if you were only intending to guarantee one meaningful part. It is also a mistake to distribute liability among different guarantors internationally. Let’s say we have a borrower in the US and two foreign guarantors located in Europe and Asia. By default, the foreign laws may present issues with collection that might impact your ability to collect in the future. The good news is you can include a choice of law provision that specifies which law will govern the agreement, and thus, which law will apply to any issues arising out of the agreement . That choice of law provision should be applied to that particular agreement—not any other agreement that the parties may have. In other words, don’t snatch the choice of law clause out of your purchase and sale agreement and paste it to this one. To be effective, the choice of law clause has to be relevant to the parties to the guaranty agreement and those parties alone.
Another common mistake I see, especially for non-guarantors, is relying on verbal assurances or not reading the guarantees carefully. Someone guarantees a loan because their parent says they are good for it and didn’t bother to pay attention to the agreement itself. We all know the old saying about "the devil is in the details." If you are a guarantor, you don’t simply want to sign, you want to take the time to read and understand the agreement. And while you’re at it, you may want to consult your attorney if things don’t seem right so you don’t end up on the hook for more than you bargained for.
FAQs
Can a guarantor agreement be changed?
To change a guarantor agreement, you have to contact the relevant person that has sent you the guarantor agreement. Then you need to make him a revision proposal for your guarantor agreement. It is recommended that you ask for a change on your guarantor agreement as early as possible. In this way both sides have time to start the change process.
When is a guarantor agreement terminated?
Ending a guarantor agreement can become necessary due to various reasons. Termination can happen when, for example: the job of the guarantor has changed, the financial situation has altered, the obligations of the guarantor are terminated or when the reason for concluding the guarantor agreement has become obsolete. The termination can only be in written form. If the guarantor agreement contains a specific start and end date, the termination will also happen on that specific date.
Does a guarantor agreement get cancelled when no longer needed?
A guarantor agreement can lose its relevance for a number of reasons. A guarantor agreement can become obsolete when, for example: the guarantor completes his contract, the guarantor is no longer financially able, or when the guarantor changes his job. The cancellation of a guarantor agreement can only happen in written form. If there is a fixed date on which the guarantor agreement ends, the expiration will also happen on that specific date.
Who is considered a guarantor?
Entities that are intending on acting as a guarantor must be aware of all their obligations that come with this role. Consequently, it is necessary that they carefully evaluate the decision of becoming a guarantor. The guarantor role can be assumed by individuals or legal entities.
Real World Examples
Guarantor agreements have been a vital component in numerous high-stakes business and real estate transactions for decades. They’re often used when the primary borrower or company cannot fully support the requested loan or lease, but the guarantor’s financial strength enables them to shoulder the responsibility. By examining real-world applications and the outcomes of such cases, we can gain insight into the scope and limitations of these types of agreements.
One notable example is the case of Bill Johnson’s Restaurants, Inc. In 1995, Bill Johnson’s wanted to lease 12 locations to franchise owners. The corporation signed guarantees for the leases and the franchisees proved to be less than reliable. Johnson’s was forced to buy back the franchises, which included buyout costs of $1.2 million in addition to the guarantees. After lengthy legal proceedings, it was determined that Johnson’s would have the ability to collect the guaranteed amounts from the franchisees over time, and later settled for a fraction of the total amount.
Another unique application is the case of Graham & Foster v. Snell. In this particular case, a mother allowed her son to borrow against her equity in her house for the purpose of constructing an office building. This loan was drafted in conjunction with another loan and the corporation was later unable to repay. The bank sued the son and mother to collect on the loans. The trial court found that the son was liable for the loan he took out , but not the one the mother had signed as the construction loan was separate from the original loan. The court awarded attorney’s fees to the mother as she prevailed on 80 percent of the claims against her.
Guarantor agreements are commonly seen in the business world, but they’re also prevalent in the residential real estate sector. For example, when a parent co-signs for his child’s first apartment lease, providing the additional assurance needed to obtain the rental regardless of the child’s creditworthiness. Or in the case of a property management company for a multi-family complex, the company would have to provide financial documents or sign a guarantor agreement helping the bank to rest assured in its decision to lend. These two examples illustrate the three conditions to be a guarantor: being creditworthy, having the ability to repay, and reliability in the opinion of the lender.
From these outcomes, we can see that public policy restraints preclude enforceability in certain situations. When one party doesn’t benefit from an agreement, then it’s not enforceable. An accountant cannot co-sign for an office lease for a babysitter, because neither party in the agreement will benefit from it. The last takeaway from the above examples is that while long-term relationships with banks typically warrant the bank waiving its rights to pursue enforcement in a limited fashion, these interests may not hold the same value post-recession.
Gaining a better understanding of guarantor agreements and how they work, in addition to real-world applications and outcomes, is crucial for individuals, businesses, and real estate investors.