What is a Guaranty Agreement?
In laymanís language, a guaranty or a guaranty agreement is the promise of a third party (the guarantor) to repay the debt of another (the borrower). The guarantor does not sign the note and is not liable to repay the note, except for terms of the guarantorís contract (the guaranty).
The guaranty may be continuing (that is, if the borrower executes more than one note, perhaps a succession of credit transactions spanning multiple years), or the guaranty may be limited to one note. The guarantor under a continuing guaranty remains liable to the lender as long as the borrower is obligated to repay any indebtedness owing to the lender the guarantor may be liable for years, perhaps decades unless the guarantor negotiates a limitation of the guarantorís liability.
When is a Guaranty Agreement required?
Guaranties are most often encountered in commercial loan transactions where the borrower is an entity with limited liability (for example, a limited liability company, or a corporation, or a limited partnership) and perhaps limited assets. Under these circumstances, the lender will require as a condition of making the loan that one or more individuals personally guaranty the note. In the event the note is not repaid, the lender may pursue multiple remedies, including foreclosure of any deed of trust which secure the note, and litigation to collect the debt from the guarantors. If the lender first elects to foreclose the deed of trust, and if the proceeds of the public sale are inadequate to make the lender whole, the lender may elect to attempt collection of the remaining balance from the guarantors. Always consult an attorney before you sign a guaranty. The attorney may be able to negotiate limitations under the guaranty agreement which may be very important in the future.
I regularly assist clients in drafting, reviewing, interpreting, modifying, and negotiating guaranties and guaranty agreements.