Understanding guarantees – What do your clients need to be wary of?

A guarantee is commonly included in a loan, a lease or commercial contract. Understanding the nuances of the agreement can be complicated, however these cannot be ignored. Being complacent about one’s obligations can expose parties to unforeseen costs which could prove to be exorbitant.

If your client is acting as the party that is giving the guarantee, you should conduct due diligence enquiries into the following:

  • Knowing the full extent of their liability. For example, if the primary liability (e.g. the loan amount) is fixed, the guarantor’s liability may extend beyond the fixed amount to cover default interest and other unforeseen costs should the creditor seek recourse;
  • Comprehending whether signing a principal contract also incorporates guarantee clauses, as this makes the entity signing also personally liable. A common example of where this occurs is a REIV Contract (used for
    almost all contracts of sale of land in Victoria) which typically requires a guarantee from the directors of a purchaser company;
  • Consider whether the guarantor’s obligations are ongoing or will the guarantor be released from their liability after satisfying an initial claim under the guarantee. For example, if your client acted as a guarantor for a tenant under a lease, the landlord could make repeated claims against the guarantor each time the tenant failed to pay a rent instalment;
  • Understanding the extent of liability if a guarantee is provided by several co-guarantors. Will you be responsible
    to meet the whole obligation in the event of default or is the liability apportioned between the co-guarantors.

However, if your client is the party relying on a guarantee, factors they must be mindful of include:

  • Understanding if the party acting as the guarantor can meet the obligations if the primary contracting party defaults. Does the guarantor have any assets to satisfy its liability?
  • Preserving liability under guarantee if the principal contract is varied. If the conditions of the contract are altered, the guarantor may be released from their liability unless they provide consent, or the guarantee is
    drafted to contemplate variations.

If your clients have any queries about their liabilities regarding guarantees or are experiencing issues, remember Morrows Legal are always happy to chat to you.

Related Posts