What is a Guarantor Agreement?
The guarantor agreement is a contract in which a person agrees to pay or take some action for another person if that person does not pay or perform on their financial obligations. A guarantor signs a written agreement to guarantee he or she will pay the house mortgage or rent, or a car hire purchase loan, for example, if the borrower cannot meet their obligations. Without the potential fall back of a guarantor, some people may not be able to secure the much needed loan.
It’s important to understand the contract that you sign when you become a guarantor . A parent may not wish to give their child money to buy a house (for whatever reasons). In this case, the parent may agree to act as a guarantor to guarantee the mortgage payments. To avoid any issues later on, it’s important to understand what you are signing and be aware of any risks.
Guarantors take on a huge responsibility, especially when guaranteeing a short term loan. For individuals, this can be a total stranger, meaning that no obvious links or resulting relationships can be relied on to ensure that the guarantor can recover their money.
Components of a Guarantor Agreement Sample
A guarantor agreement template will typically include the basic information that is critical to the enforceability of a guarantor agreement. While each guarantor agreement will vary from agreement to agreement depending on the facts and circumstances of each guarantor, a guarantor agreement template generally will contain the following provisions: Party and Background Information The first part of a guarantor agreement template will contain the names and addresses of the parties (the individual giving the guaranty (the "Guarantor"), the individual benefitting from the guaranty (the "Lender") and, if applicable, the physical address of the individuals or corporate entities (the "Transaction"). In addition, the Guarantor should be asked to identify the basis for the Transaction and the estimated amount the Guarantor may be liable for. The Guarantor must also be instructed to read the paragraph that is often included in these agreements that reads: "Indebtedness: THIS INDEBTEDNESS IS HEREBY STUDIED TO BE THE SPECIFIC INDEBTEDNESS AND OBLIGATIONS UNDERLYING THIS GUARANTY." The Guaranty The guaranty itself will ordinarily provide for the unconditional guaranty by the Guarantor of payment of all indebtedness due pursuant to the Transaction, as well as, if applicable, all costs and fees associated with the collection of any amount due. The guarantor agreement template should also specify the remedies or the restrictions with respect to the remedies available to Lender in the event of a default. In addition, it should define the term "Default." Finally, it should also incorporate the following ideas: The Guarantor should be asked to initial these items. Some states prohibit exculpatory clauses, releases, limitations on liability, and other waivers of legal rights, and the inclusion of such provisions in the guarantor agreement template may render the agreement unenforceable.
When to Utilize a Guarantor Agreement
There are a number of common scenarios where a Guarantor Agreement will be needed. The most obvious one is for a Landlord to make sure that they have someone to turn to if their Tenant is unable to pay the Rent. Similarly, a Lender will want someone who can be obliged to pay back a Loan if the Borrower is not able to do so on his own. A Guarantor Agreement is ideal for those circumstances.
Outside of these examples, you would not always want to force somebody to act as a Guarantor. The potential exists that they may feel pressured into entering into the Guarantee, especially if they are a friend or family member. For this reason, it is often better to ask.
One common situation where it is normal to ask someone to act as a Guarantor is if a Tenant wishes to rent an apartment with a Lease. Landlords will sometimes ask for a Guarantor to be put in place who will pay the Rent on behalf of a Tenant who cannot demonstrate their ability to do so.
The Lender and the Borrower may agree that a third party (usually a company) should be held responsible in the event that the Loan is not paid back. The Lender would like some assurance that they will be compensated if they are not re-paid.
Companies can also ask their Directors and/or Shareholders to guarantee that Loans that the Company engages in will be re-paid. If the Company is not able to do so, the Guarantor(s) will be asked to. This way, the Guarantor can be confident that their personal finances are safe.
In the event that an employee of a Company wants to be given a Loan or similar financial arrangement, he may need to present a Guarantor. This is again to ensure that if the employee does not repay the Loan, that the Employer will be able to reclaim their money.
Often in situations where a credit provider could say no, the customer may be offered the option of using a Guarantor. In order to be able to enter into a Guarantor Agreement, however, they must still qualify on their own, as the customer must be using the most reliable way of repaying the finances. If they do not, then the credit provider could be charged with reckless lending.
Best Practices for Drafting a Guarantor Agreement Sample
A well-constructed guarantor agreement template should have a comprehensive overview of all the obligations of both the guarantor and the debtor. The guaranteed obligation should be clearly defined in order to avoid potential confusion or conflict at the time the agreement is enforced. All relevant financial details should be outlined, including the amount, payment terms and any interest that may accrue on the amount owed. An important consideration is the legal capacity of the parties to enter into a binding contract. Make sure the parties are legally allowed to bind themselves to a debt. For example, minors are generally prohibited from entering into contracts. As with all good contracts, the guarantor agreement template should be written in clear, concise language that is easy to understand. In order for the agreement to be binding and enforceable, it should be signed by all relevant parties. It is always advisable to get help from a highly qualified attorney when drafting or updating a template. Your lawyer will be able to provide professionally legal advice that helps you create the most effective and binding guarantor agreement template possible.
Legal Risks and Considerations
Guarantor agreements carry with them a litany of legal considerations and risks to the prospective guarantor and the primary borrower. First and foremost, a guarantor agreement exposes the guarantor’s assets to risk. Unlike a regular loan in which only the assets of the primary borrower are subject to risk of loss in the event of default, if the loan is secured, the guarantor also risks any collateral he or she has pledged as security for the loan (unless a non-recourse loan structure is involved).
The guarantor also risks becoming embroiled in a protracted foreclosure action in the event of default on the loan. Guarantor agreements are also susceptible to adroit challenges by shrewd litigants. Aggrieved guarantors may attempt to challenge the validity of the guarantor agreement by arguing that they did not voluntarily assume the debt to be secured in the guarantor agreement or that the consideration supporting the guarantor’s assumption of the debt is inadequate.
The ultimate risk that a guarantor faces in executing a guarantor agreement is the burden of satisfying the foreclosure judgment on the underlying obligation if the primary borrower defaults on the underlying debt. This may entail a shortfall in proceeds of sale in amount equal to the judgment debt , ownership interest in the mortgaged property (in the case of a foreclosure of a loan secured by a mortgage) and the cost of payment of reasonable costs and expenses, including counsel fees, incurred by the lender in enforcing the terms of the guarantor agreement.
In light of the potential risks associated with guarantor agreements, documents should be scrutinized to ensure their validity and conformity with applicable state and federal law. Where a guarantor association is based abroad, particular attention should be paid to the framework of the guarantor association to ensure it is valid under foreign law, and that the guarantor association is able, under foreign law, to execute a guarantor agreement. Finally, where the guarantor is an individual, parties should ensure that they comply with applicable state and federal consumer protection laws (such as the Truth in Lending Act), including legalities surrounding advertisements and solicitations for loans as they pertain to guarantors.
Tailoring a Guarantor Agreement Sample
Not all guarantor agreements are identical, and a successful guarantor agreement template will require a certain amount of modification to reflect each party’s specific needs. After selecting a satisfactory guarantor agreement template, the first step in the process is to remove any redundant sections or paragraphs that do not apply to the relevant loan, borrower or lender.
The next step is to ensure that a timeline is present that includes specific due dates for payments and any other items of note. It should also contain a clause that outlines the consequences for missing payments.
Any relevant clauses, such as a financing clause, should also be included in the guarantor agreement. One example of this would be a growth clause or shrinkage clause, which provides clarity for the lender on what will happen to the loan in the event of a business change, such as a merger or acquisition, of the guarantor. A third party should also be able to easily read the guarantor agreement after it has been completed to ensure language is clear and that the terms are not unknown to either of the parties.
After ensuring that the template contains all necessary clauses and pertinent free text fields, the final step is simply filling in the blanks with the accurate information for the guarantor.
Common Pitfalls to Avoid
Common mistakes made when entering into a Guarantor agreement include;
a) Signing without reading the Agreement – This is more common than one might think and in doing this, the Guarantor does not know what they are signing or the potential impact or consequences that signing the Agreement may have.
b) Not taking proper advice – The Guarantor should always take independent advice from their solicitor before signing the Agreement. Although they may have been provided with a Guarantor Agreement and given whatever time they want to read it, the fact remains that a bank, lender or landlord will not be able to provide independent or objective advice.
c) Not getting the correct legal advice – A Guarantor should take advice from a specialist who is knowledgeable about the risks and impact of becoming a Guarantor. For example, it may be right for one Guarantor to limit their liability or the amount that they will be liable for but the bank, lender or landlord may not allow that. No deal is the end or risk is correctly explained then significant personal risk could be created and an individual could expose themselves to potentially losing the family home if the borrower defaults on the loans or rental payments.
d) Official identification – Confirming who you are when becoming a Guarantor can seem trivial but it is important to get this right. The Guarantor must be over 18 years old and to confirm your identity, you will usually be required to produce your passport, National Insurance number, or Driving License. Without this, the Agreement may be void and therefore worthless.
e) Sufficiency of Loan / Debt – This is more an issue for the borrower but it is worth noting. If the loan being guaranteed is insufficient to pay off the debt, if things go wrong, the Guarantor could be stuck with a large bill to pay.
Selecting the Right Guarantor Agreement Template
To ensure the guarantor arrangement fulfills its intended purpose, parties must select the correct guarantor agreement template. Factors to consider include the type and scope of the guarantee as well as the nature of the underlying agreement for which the guarantor is providing a guarantee. For an agreement involving normal personal use of goods or services, the relevant consumer protection legislation may apply. Such legislation generally affords certain rights to the guarantor in order to protect the guarantor. In some cases, such legislation may require that the guarantor agreement be specific rather than generic; if so, then the guarantor agreement must (in most cases) specifically delineate the rights and responsibilities of the guarantor as opposed to using a template guarantor agreement.
If the subject of the project is for a personal consumer-oriented guarantee , you may require a personal guarantor agreement that complies with applicable provincial legislation, such as the Personal Property Security Act (PPSA). The PPSA, for example, provides certain rights to the consumer including the right to receive a statement of account within 21 days of such a request. If the guarantee is for a business-oriented purpose (or if a specific guarantee is required by other legislation), then a simple generic template may suffice. In addition to the disposition of rights and responsibilities of the parties, you should also review specific requirements of guarantor agreements under relevant provincial consumer protection legislation to ensure compliance.