What Constitutes a Guarantor Contract?
When it comes to a guarantor contract definition, this is essentially any agreement which guarantees that one entity, the guarantor, will assume responsibility for the debts or obligations of another entity, the debtor. This is an important factor to keep in mind if you are planning on taking out a loan or looking at signing a lease agreement. In either situation, a lender or landlord may ask another party to sign a guaranty, vouching for the financial responsibility of the debtor.
A full guaranty guarantees, and obligates the guarantor to take on , responsibility for every obligation of the debtor or borrower. A limited guaranty, as its name implies, only grants the guarantor limited responsibility, with guarantees given only for specific, pre-determined obligations.
The use of a guarantor contract can have significant benefits for both parties involved. For the borrower or debtor, it represents a way to get approved for credit or a lease, while for the lender, it represents a way to get a person with a strong credit history to vouch for the financial responsibility of a less-than-ideal borrower.
Elements of a Guarantor Contract
The essential elements of a guarantor contract include:
Parties Involved
In order for there to be an enforceable contract, there must at least be two parties. Each party needs to have legal capacity. This means you need to be at least 18 years old and of sound mind in order for you to have legal capacity. This point can become an issue if any of the contracting parties are not in a sound mental state, such as a minor child or an adult who has been adjudicated as incompetent to make informed decisions regarding their own health care and finances.
Obligations
Private guarantors are legally responsible for guaranteeing a set amount of money, usually a certain percentage of the amount loaned to their guarantee. They agree to repay the money owed to creditors if the principal debtor cannot do so. The creditor receives the money from the guarantor. The creditor is not responsible for collecting the money from the borrower. Private guarantor contracts state the obligations of each party, so each knows the liabilities they incur by signing the contract.
Conditions
There are certain conditions that guarantor contracts place on the debtor and creditor. These include scheduling payment dates and amounts, specifying how the debtor will repay the debt, what happens if the debtor pays off the loan early, and what happens if the debtor defaults. The lender may include a provision to prohibit the debtor from obtaining credit during the period of time the guarantor’s obligation exists.
Terms
Written contracts are made up of three distinct terms:
These key terms form the features of the contract. They list the specific conditions of the contract, such as the amount of money the guarantor has agreed to repay, the payment schedule and conditions that trigger automatic repayment, such as missing the loan payment. It is vital that the terms be clear and easy to understand.
Different Kinds of Guarantor Contracts
There are two types of Guarantor Contracts: Limited Guarantees are provided where the amount of the guarantee is a fixed sum. For example, if the tenant owes the landlord £10,000.00 in respect of rent arrears, the landlord can claim that amount from the Guarantor. It will be for the Guarantor to recover the tenant’s money from the tenant.
Unlimited Guarantees are provided where the landlord can claim from the Guarantor any amount owing by the tenant to the landlord. For example, if the tenant has rent arrears, not only can the landlord claim £10,000.00 from the Guarantor in respect of the rent arrears but he can also claim the cost of repairing damage to the property caused by the tenant, claim in respect of service charge payments and claim for loss of rent.
It is common for landlords to insist on an unlimited guarantee from the Guarantors when the tenant is a limited company (often SPV’s) or is otherwise unlikely to satisfy a landlords claim without recourse to the Guarantor.
A Sample Guarantor Contract with Important Terms
A Guarantor Agreement is a contract based on the rules of private property. That said, the following clauses are commonly found in guarantor contracts.
The Guaranty Clause
A clause that clearly sets out who is guaranteeing what, for how long, and which obligations are being guaranteed. For example: "This Guaranty shall be in addition to all other Security Interest covering obligations of the Debtor [X] to the Lender [Y], including the loan with Contract Number 123 and due and payable on June 1, 2008 and the new Real Estate Loan that is obtaining herewith." In this case, the obligation is limited to the real estate loan being had at present. This protects the guarantor against future loans, reductions in loan interest rates, loan renewals, loan increases, etc. The guarantor must sign each and every time they agree to act as guarantor to a new obligation.
In writing
Some obligations are enforceable for oral promises, while others must be put in writing, with the signature, to be enforceable. Always get the signature. The clause may include a statement like this one: "No oral agreement of Guarantor shall affect or modify the terms of the written Guaranty." The clause may also limit modification of the Guaranty Agreement to those in writing and signed by the Guarantor and Debtor.
Default Clause
What constitutes default? A late payment? One incident? Or several? There is no set answer to this. The answer depends on the circumstances of the agreement.
Remedies
So what happens if the Contractor/Guarantor does not pay their debt?
This type of clause sets out the steps at law the creditor takes to ensure that the debtor does repay the debt. It can involve steps outside the court system: repossession, selling the repossessed property, plus interest debt can lead to legal action where the creditor pursues the debtor through courts to collect on the debt.
All Guarantor clauses must be made according to the laws of the province they are executed in.
What Obligations Are to Be Fulfilled by a Guarantor?
A guarantor’s legal obligations will usually be that every time a borrower fails to comply with their obligations under the loan contract, that person must pay money or do other acts required to rectify the borrower’s non-compliance.
When a loan contract allows money to be claimed from a guarantor and the borrower fails to pay that money, the lender may claim it from the guarantor. It doesn’t matter whether the borrower has the money or not, because the guarantor’s obligation is to pay the amount claimed.
If the loan contract requires a borrower to do an act to rectify any loser, as a principal obligation or a condition of borrowing funds which are provided to be used on the Borrower’s behalf, and the borrower fails to rectify the loss by doing the act, the guarantor must.
If the borrower suffers loss and the loss could reasonably have been rectified had the borrower done the act or exercised care to such extent as a prudent person would exercise, then the guarantor will be under a legal obligation for that loss.
In addition to legally binding obligations enforceable in court, a person who signs a guarantee may have non-binding obligations arising from the contractual and tortious duties owed in private law by the borrower to the lender up to the limit guaranteed. For example, a borrower’s obligation to act honestly in negotiating the construction of the loan agreement up to a loan facility limit.
The lender may enforce payment of these non-binding obligations by the Guarantor in respect of any loss suffered by the lender up to the limit guaranteed under the Guarantee.
The borrower does not have a right to have legal proceedings brought against a third party in relation to their debt if to be enforceable the borrower’s obligation to take action are not for the benefit of the third party; and enforceability if the statement is relied upon by a third party to their detriment. A lender may enforce these obligations through the guarantor.
Procedure to Formulate a Guarantor Contract
The first step in this process is to name the guarantor as the party in the contract. This is generally accomplished by putting the name of the guarantor as the party as follows: "ABC Corporation, a North Carolina Corporation, Guarantor." This lets the world know that this is a "triangular" type of guarantee. This example is actually a bit more specific because it identifies the state of incorporation for an entity, which can be relevant. The second step involves identifying the party with whom there is a guarantee. In some instances, there may be multiple parties, or other third parties. This is often done using "in favor of" language using a language like this: "in favor of ABC Bank (or whomever) as Lender and Agent for each of the banks and financial institutions securing the subscriber’s transactions with each of them, and their respective successors and assigns." As can be seen, this is fairly broad language. A narrower approach might limit the context to "Guarantor, in favor of ABC Banking Corporation … as, agent for banks and financial institutions…" Again, this is just an example, and narrow to a few parties. You would not generally include verbiage such as "and their respective successors and assigns," as that would be a reference to banks in general, not to particular banks. From there, terms can be added, such as the purpose of the guaranty, the dollar amount, what is not covered, when and how the guarantor’s obligation arises, whether the guaranty is continuing, revocation, liquidation , and acceleration. It is possible that some of these items would be best covered in separate sections or documents, such as an indemnity agreement. For example, a limited guarantee where business is being acquired by an individual that caps the liability for the individual at, for example, $50,000, would generally be considered a limited guaranty and would be all that would be necessary if the individual is only obligated to pay up to $50,000. If, however, the guarantee would go beyond that, a higher level of specificity should be applied. Over the years, I have had multiple clients come to me, after there was a financing or another transaction, where they were clearly trying to avoid or escape their obligation and were basing their efforts on the "one page handwritten contract" with no counsel reviewing or approving it beforehand. Accordingly, it is recommended that you obtain experienced counsel on both sides of a transaction. The costs of the counsel are usually more than offset by the benefits for everyone. As explained above, this is a business transaction, often between experienced players. There may be concern that counsel involvement will cause friction in the transaction or may be totally unnecessary. However, I have observed a different result in many cases. Many times, counsel can suggest an alternate way to structure the transaction that makes everyone happier. Another example, may be limiting the scope of a guarantee so that closing may occur without the additional steps and time to require a guaranty. Even though it costs more up front, this can make the difference between getting a deal done.
Common Pitfalls to Avoid
Common mistakes to avoid :
Absolutely yes or always yes
Life is always more complex than simply saying "yes" to something.
A common mistake made by the creditor is not properly defining the obligations being guaranteed by the Guarantor
In certain circumstances it may be appropriate to have a cap on the amount of the guarantee or to place limits on its application. This is particularly the case in the context of facilities such as overdrafts which can fluctuate.
Abstract reference to a company
A common mistake made by creditors is to enter into a guarantee where the Guarantor is a company which is not a named party to the guarantee.
A company’s liability in a guarantee cannot be qualified by the use of terms such as "associated", "influenced" or "affiliated" or through the use of a trading name. This can be a problem for lenders if the intended principal debtor then sells off part of its business and/or assets to a different company, or even if the principal debtor changes its name. As a result, even though a Guarantor has signed up to a guarantee, it may not actually be liable under that guarantee if its business or the business of the intended principal debtor is transferred.
Proper consideration
It is common for companies and other entities to have borrowers acting on their behalf. Nevertheless, a common pitfall is to fail to ensure that the Guarantor is suitable. In particular, the Guarantor or provider of security must be able to meet its obligations to the lender and must be able to do so in a timely manner.
It is important to consider whether the Guarantor is a party to any other arrangements which may feature prominently in the future and which may also seek to limit the Guarantor’s liability. These include factoring arrangements, operating leases and any mechanism for financing future working capital requirements. Potential pitfalls are to ignore the ramifications of these at the outset and failing to consider the rate of interest charged both now and in the future in respect of the facility to be provided and the ability of the providers of security to meet this financial liability.
Language used
Another common pitfall is the use of imprecise language and terminology in the drafting of the guarantee. This will usually be as a result of poor drafting and is entirely avoidable.
In particular, there is no value in having expansive and imprecise language in a guarantee which defeats its whole purpose.
Guarantor Contracts in Practice
In a 2016 case where catchy phrases and witticisms were exchanged in the UK Supreme Court, the court considered the enforceability of a guarantee. In Gary Winstanley v E coll. UK, the claimant, Gary Winstanley, made guarantees for construction costs of a property developed by Mayfair Private Capital ("MPC") and accepted by Alan Filters "Director". MPC fell into difficulty with the lender, following which Gary Winstanley sought to escape liability under the guarantee.
The issue before the UK Supreme Court was whether filters acted as a director of MPC whilst Winstanley made the guarantees. The category of directors includes not only those who are formally appointed as such, but also those who merely act as a director. The court held that because Filters identified himself as the director in contemporaneous documents, including when the guarantees were made, he could not later assert that he was not a director.
In the recent English Court of Appeal case of CV Prospects v TP Mezzanine, the court looked at a guarantee that had been signed by someone other than the principal. The Claimant, Pandora Prospects Limited ("PP"), gave a loan to 48a Talacre Beach Limited ("Talacre Beach"). The Claimant alleged that it was entitled to repayment of a loan from another company, TP Mezzanine Limited, who had guaranteed the performance of the Obligors (i.e. Talacre Beach) in the event of default or insolvency.
The Defendant, TP Mezzanine Limited ("TP Mezzanine") contended that the Guarantee was unenforceable as a result of ss 26 and 27 of the Land and 24 of the Companies Act 2006. The Court concluded that the Guarantees were validly executed and TP Mezzanine was liable for the repayment of the loan under the guarantees. It was admitted that the company secretary had signed albeit with no company seal accompanying the signature.
The Court found that the Guarantee was validly executed on behalf of the lessee despite neither the company secretary or the company name being specified on the deed.
FAQs on Guarantor Contracts
Can the landlord advertise or give up my personal details to other agencies?
No, your landlord must keep your information confidential. It can be passed on to the utility suppliers and local council to inform them that you are now responsible for paying the bills.
Can I have multiple guarantor contracts at once?
No, you can only be a guarantor for one flat at a time. When you switch to a new property, your old contract can be terminated by the landlord and the security deposit returned to you .
How can I cancel a guarantor contract?
You can’t if you are still in the flat you used to guarantor for. You can only terminate the contract if the tenant gives written notice to leave the property, upon which time your landlord can return your deposit.
What do I do if I’m threatened with eviction as a guarantor?
This is an illegal practice. Contact your local council’s housing services team immediately and ask for legal advice.
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