So you have been asked to sign a Guarantee. Do you know what you are doing?
For those of you who may be asked to sign a guarantee or who have signed a Guarantee, you should understand its full effects and potential consequences.
In Alberta, signing a Guarantee requires that the person guaranteeing must sign in front of a lawyer to ensure that the Guarantor fully understand the nature of the Guarantee, and this is a legal requirement of the Guarantees Acknowledgment Act (Alberta).
Most guarantees that you may be asked to sign have provisions that have been considered over many years, sometimes clearly containing provisions by Lenders that are outcomes of legal disputes regarding the enforceability. The following commentary applies to most Guarantees.
You (as Guarantor) Become a Borrower.
Often you have been asked to sign a Guarantee, by which you directly agree to pay a loan, or obligation, otherwise to be paid by the primary Borrower (or debtor). By signing the Guarantee document, you effectively become the borrower as if you received the money. The monies being borrowed will not have been advanced to you, but to some person (the primary borrower), but you are promising to pay it back as if you received it.
For these reasons, you must consider very carefully whether you wish to guarantee such repayment.
Although generally the Lender will first seek repayment of the debt from the primary Borrower, however, the Guarantee you are signing most usually actually states that the Lender can seek repayment from you without having to seek repayment from the primary Borrower. Accordingly, you must consider very carefully whether you wish to Guarantee.
Extent of the Guarantee
Guarantees are often in a general form, and sometimes may state that the Guarantor guarantees repayment of any and all indebtedness of the Borrower to the Lender. These types of Guarantees are particularly dangerous.
Whenever possible, the Guarantee should specifically reference a specific debt, or a specific loan amount, being guaranteed. Unless the Guarantee is a guarantee of a credit line that is intended to fluctuate, the guarantee should not permit liability for future advances of principal to the Borrower, not otherwise consented to, by you as Guarantor.
If the Borrower Fails to Pay
If the primary Borrower does not pay the loan or obligation, the Lender will demand payment of the Loan or obligation from you. If this happens, call a lawyer immediately.
Defences to Claims against You
Once you sign the Guarantee, your ability to defend any claim made against you by the Lender for payment on the Guarantee is very remote and difficult.
However, in some circumstances, you may have a defence, or you may have an ability to limit any liability.
As such, it is important for you to keep all records and communications regarding the how it came to be that you agreed to guarantee, and provide these to your lawyer.
State of Account
Although the Lender will always have to prove that the debt is due should the Lender wish to sue you in Court to recover the money, the Guarantee usually states that you will not be able to dispute the actual state of account regarding the loan as exists between the Lender and the Borrower.
Security of Lender Against Borrower’s Assets
The primary Borrower may have given security (such as a mortgage over land, or over other property or equipment). The Guarantee usually states that the Lender may release that security, or the Borrower may sell the property, and you will still be liable on the debt.
When that happens, you as the Guarantor may subrogate (take over) the lender’s security against the Borrower’s assets.
Factors to Consider Before You Guarantee
For the foregoing reasons, before you sign the Guarantee, you should be fully aware of many factors, including but not limited to:
The financial well-being of the Borrower, both now and in the future;
The reason that you are being asked to sign the Guarantee, and whether signing the Guarantee is in your best interests;
Whether you are signing the Guarantee because you are being intimidated, threatened, or under some other physical, emotional or economic duress;
What control you may be able to exercise over the affairs of the Borrower, such that you can determine the state of the account between the Lender and the Borrower, the state of the assets being secured to the Lender for the loan, and whether you can continue to monitor the health and physical state of the primary Borrower, or the business, and so forth;
Whether you can put a limit on the liability amount of the Guarantee, thereby limiting the amount for which you will be responsible to pay; and
Whether you can put a limit to the time for which you will be liable to guarantee the loan or obligation.
How to Protect Yourself
If you are going to guarantee another person’s loan or other obligations for repayment, you (as guarantor) may consider obtaining security by way of a mortgage or charge over the assets of the Borrower because:
Although the security that you obtain may be secondary (or subordinate) to the security of the Lender, this may, nevertheless, help you in the future and give you some control over the primary Borrower.
For example, if you are giving a guarantee over the loans of a corporation, then you as the Guarantor should register security over the assets of the company.
If you, as the Guarantor, are called upon to pay the company’s loan, you will then be secured by the assets of the Borrower for repayment of the debts.
Further, if you are assisting someone else by signing a guarantee , you may want to register security over that persons assets, “ just in case” you are called upon to pay his debts .This also prevents the borrower from disposing of his assets, thereby leaving you high and dry.
Keep Contact Information Up To Date
Always keep the Lender notified of any change to your contact information (address, telephone, email), and request that you be advised if the lender has any issues regarding repayment by the Borrower.
You must try to be informed of any actions taken with respect to the Guarantee to properly protect yourself.
When to Seek a Lawyer
If you become concerned about:
the financial well-being of the primary Borrower,
the Borrower’s assets that are securing the primary loan,
the health of the Borrower, or
the Borrower’s ability to repay the loan,
then you should immediately seek legal counsel. Your legal counsel can explore options to limit your potential liability, or to take control over the Borrower’s situation.
Signing the Guarantee’s Acknowledgment by Notary Public
A Lawyer will only sign the Guarantee’s Acknowledgment on your behalf, after you confirm to the lawyer:
that you fully understand the nature and effect of the Guarantee that you are signing,
that you understand how much money you are guaranteeing,
that you are signing the Guarantee without duress or intimidation, and of your own free will,
that you advise the lawyer that it is in your best interest to provide the Guarantee, and
that if it is not in your interest, you should explain to the lawyer the rationale for which you are signing the Guarantee, and confirm the reasons you are doing so, and in which case have been cautioned about the potential negative outcomes.
Keeping a Copy of the Guarantee
You should always keep a copy of the guarantee, and periodically, at least once a year, bring the “file “ containing the Guarantee forward for your attention and consideration as to whether you wish to have the Guarantee continue.
An appropriate timing of that review, for example is if you have guaranteed a company debt, when you review the annual financials of the company [ which should be a condition you impose on the Borrower when you agree to guarantee].
Continuing the Guarantee
Often the guarantee is given in connection with a fixed term loan that may have a renewal option [i.e.. a mortgage loan]. Consider asking for a condition of the Guarantee that you as Guarantor be consulted and that you must agree before the loan is renewed or its term extended.
Of course if you do not agree, the loan may then be called and you may be asked to pay on the Guarantee, but in certain situations that may be the optimal outcome, rather that simply allowing the loan to continue and perhaps increasing your potential exposure.
If You are Called on to Pay
As Guarantor, you may subrogate to the Lender’s security (take over) on the assets of the Borrower if the Lender calls on you to pay. However, the usual Lender approach is first to recover payment from the Borrower and against the Borrower’s assets under the Lender’s security, before the Lender seeks to obtain or enforce a judgement against the Guarantor.
In this regard, a lawyer’s advice is often needed, as each situation is different.
Questions
If, at any time, you have questions regarding any Guarantee, you should raise those questions with your lawyer.
If you have concerns that you have previously signed a Guarantee, you should contact your lawyer for advice as soon as possible.
Any delay in seeking legal advice may negatively affect your future rights or your financial condition.
Getting the Guarantee Back
When the debt that you have Guaranteed has been repaid, seek the return of the Guarantee. This is particularly important in respect of some Guarantees which have language that the Guarantor guarantees any and all debts of the Borrower.
I guarantee that ignoring the foregoing Guarantee issues will be to your disadvantage.
Clive Llewellyn - Llewellyn Law