Personal Guarantees: Because Good Intentions Aren’t Binding

• Tina
  Pashootan

  Tina
  Pashootan

  view bio

When a commercial lease agreement or loan agreement goes awry, recovering what is owed can become a challenge, especially if the borrower or tenant is a newly incorporated company with limited assets. For lenders and commercial landlords, one of the most effective ways to manage that risk is through a personal guarantee. Personal guarantees offer a direct line of recourse, one that can make the difference between a write-off and successful recovery when things do not go as planned.

What Is a Personal Guarantee in a Commercial Lease or Loan?

A personal guarantee is a legal promise made by an individual, usually a director, shareholder, or someone with a vested interest in the business, to be personally responsible for the company’s debts or obligations. If the company defaults, the guarantor is personally liable for business loan or lease obligations.

This could cover a range of liabilities, including unpaid loans, lease payments, damages to property, or even ongoing contractual obligations. While the company remains the primary party responsible for the obligations, the personal guarantee provides creditors another path to recover what is owed.

Why Personal Guarantees Matter for Landlords and Lenders

For lenders and landlords, personal guarantees continue to be a reliable way to manage risk. Smaller businesses often operate with limited assets, making it difficult to enforce obligations in the event of default. A personal guarantee adds a safety net that someone with financial means is backing the deal.

It also provides an added incentive. When a business owner knows their personal finances are on the line, they’re often more diligent about meeting their commitments.

Unlimited vs. Limited Personal Guarantees

Unlimited Guarantees

As the name suggests, this is an unlimited guarantee that holds the guarantor fully responsible for the entire debt or obligation, regardless of the amount. This offers maximum protection for the creditor but carries significant risk for the guarantor. These guarantees should be drafted carefully and clearly to ensure they are enforceable and effective.

Limited Guarantees

A limited guarantee places a cap on the guarantor’s liability. The limit could be a specific dollar amount, a fixed percentage of the total obligation, or even tied to specific events, such as unpaid rent during a certain lease period. These are often more acceptable to guarantors, especially in lease negotiations or when multiple guarantors are involved.

Key Elements of a Legally Enforceable Personal Guarantee

A well-drafted guarantee is more than just a clause tacked onto a contract. It should be tailored to reflect the specific transaction and parties involved. Here are a few key elements to consider:

• Clear scope of liability: Be specific and clearly define what is being guaranteed. Does it include just the principal amount, or also interest, legal costs, and future amendments?
• Effective waivers: Including certain waivers can limit the guarantor’s ability to challenge the lender or landlord’s claim and help prevent technical defences later on.
• Spousal consent: If the guarantor’s assets are jointly held (especially the case with real estate), obtaining consent from a spouse can prevent future challenges to enforcement.
• Compliance with laws: Under Alberta’s Guarantees Acknowledgment Act, the guarantor must appear before a lawyer (a notary public is not sufficient) to confirm they understand the nature and consequences of the guarantee. The lawyer must then complete a certificate of acknowledgment. Failure to follow this step can render the guarantee unenforceable.

Further Considerations for Lenders and Landlords

To get the most out of a personal guarantee, consider the following:

• Evaluate the guarantor’s financial position: A guarantee is only as valuable as the guarantor’s financial strength.
• Review guarantees on renewals or changes: Any change to the lease or loan agreement could affect the validity of the original guarantee. You may need to update or reaffirm the guarantee.
• Match the type of guarantee to the transaction: Remember, not every situation needs an unlimited guarantee. An unlimited guarantee may be appropriate for a large loan with significant risk, but in some lease scenarios, a limited guarantee may be more commercially realistic and still effective.

Personal guarantees are a powerful tool for lenders and landlords in legal risk management, but they are not one-size-fits-all. Whether you’re preparing a new guarantee or reviewing an existing one, working with legal counsel ensures your interests are protected. If you have questions or need help reviewing your documents, we’re happy to assist.

_{This post is meant to provide information only and is not intended to provide legal advice. Although every effort has been made to provide current and accurate information, changes to the law may cause the information in this post to be outdated.}