Q: The bank is obtaining several guarantees for a new loan in Ontario secured on personal property.Do I need to make each of the guarantors signatories or parties to the commitment letter or loan agreement?
A: As a general rule, it is always a good practice to include guarantors as signatories on the principal documents evidencing a loan.
Corporate guarantors and other business entities within the borrower’s corporate group should be made parties to the commitment letter or loan agreement. In most cases these guarantors will be providing unlimited guarantees and joining in some, if not all, of the representations, warranties and covenants of the borrower. Making them parties to the loan agreement will ensure that they cannot claim they were unaware of the terms of the debt they are guaranteeing. As parties to the principal loan document, they will also be parties to any amendment to that document and will thereby be consenting to the terms of that amendment and the impact of those amended terms on their guarantees.
For guarantors providing guarantees that are either limited in amount or limited in recourse to certain assets, these guarantors must also be made parties if they are joining in some of the representations, warranties and covenants of the borrower. However, if they are not joining in those provisions, both the guarantors and the borrower will probably request that the guarantors not be included as parties. The guarantors will probably wish to avoid all the negotiations and circulation of document drafts prior to signing. In addition, the borrower will likely wish to avoid involving these guarantors in its affairs until the business deal has been settled. In these instances however, it will be necessary to ensure a guarantor’s written acknowledgment is obtained to every post-closing amendment to the commitment letter or loan agreement.
For guarantors who are individuals, it is appropriate to have them be parties to the principal loan document where those individual guarantors are also officers or directors or shareholders of the borrower and have a close connection to its operations. If these individuals do not have that connection, then once again the borrower will likely wish to avoid making them parties and to avoid involving them in the transaction until the business deal with the lender has been settled. Provided all appropriate certificates of independent legal advice are obtained at the time of the execution and delivery of the guarantee, and periodic guarantor’s acknowledgments are obtained on amendments and for the passage of time, those unconnected guarantors need not be parties to the principal loan document. Indeed, they will likely be limited guarantors or limited recourse guarantors in any event.
Overall, including guarantors as signatories on the principal documents evidencing a loan is a good approach unless client relationship issues or special circumstances like those described above exist.