UNDERSTANDING THE ROLES AND RESPONSIBILITIES OF A GUARANTOR

A guaranteed loan is a loan that a third party guarantees or assumes the debt obligation for, in the event that the borrower defaults. The third party is a guarantor often making reference to either a legal person or an individual who promises to pay a borrower’s debt in the event that the borrower defaults on their loan obligation.

Guarantors can either be limited or unlimited, with respect to different levels of financial involvement.

A limited guarantor may be asked to guarantee a loan only up to a certain time, after which the borrower alone assumes responsibility for the remaining payments and alone suffers the consequences of defaulting.

Unlimited guarantors on the other hand, are liable for the entire amount of the loan throughout the entire duration of the loan agreement.

In rare instances, individuals (borrowers) act as their own guarantors, by pledging their own assets against the loan. In Kenya, it is to be noted that the term “guarantor” is often interchanged with the term “surety.”

A guarantee is a significant element when an agreement is made between two parties to advance a loan facility and thus the inclusion of a guarantor is necessary. For instance, when the lender has less confidence in the borrower due to a low credit score, the presence of a guarantee can attract the lender. A guarantor thus needs strong credit, a good income, and adequate assets to guarantee loan repayment.

Some of the mandates of a guarantor include:

• A guarantor guarantees to pay a borrower’s debt in the event that the borrower defaults on a loan obligation.

In a guarantor loan agreement, the Guarantor will pay to the Lender, upon demand, all money and discharge all obligations and liabilities, whether actual or contingent, owing or incurred to the Lender by the Principal Debtor.

• The guarantor guarantees a loan by pledging their assets as collateral.
• If the borrower defaults on their loan, then the guarantor is liable for the outstanding obligation, which they must meet, otherwise, legal action may be brought against them.

The Rights of the Guarantor

Unlike a co-signer who co-owns the asset purchased via the loan facility advanced to the borrower by the lender, a guarantor has no claim to the asset purchased by the borrower.

It is thus crucial to be aware of the few rights available to you as a guarantor if the borrower defaults and the lender pursues you to repay the outstanding debt. These include:

• Reimbursement: if a guarantor paid any part of the borrower’s debt, the guarantor can pursue the borrower to recover the money paid or any out-of-pocket expense incurred in paying the debt. Specifications on this may vary from contract to contract.
• The right to subrogation: if the guarantor pays back the lender/ financial institution in full, the guarantor is released of liability to them and consequently becomes the lender. As a result, the guarantor then has all the same rights as the bank did to collect the debt from the borrower.

In the event that the borrower has a claim against a third party that has caused the default, the guarantor has the right to invoke the doctrine of subrogation (“step into the shoes of the borrower”) in order to recover damages.

• Collection from other guarantors: had there been multiple guarantors on the guarantor loan agreement and a guarantor paid more than his/her share of the debt or even satisfied the debt in full, he/she can pursue the other guarantors for their aggregate portions.

How can we assist you?

At Netsheria International, we have an experienced team of lawyers who can offer you legal assistance in your Guarantor Loan Agreements. Please contact us for our services via email or visit our website for more information on our services.

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KEY ELEMENTS OF A GUARANTOR LOAN AGREEMENT

A Guarantor Loan Agreement (also known as a Deed of Guarantee) refers to an agreement between a Financial Institution (the Lender) and the Guarantor detailing the rights, responsibilities, procedures, terms, and conditions under which a loan provided by a Financial Institution and advanced to a Borrower may be guaranteed.

6 key things to consider

Whether you are entering into a guarantor loan agreement as the guarantor or the lender, there are many important considerations to be made. Some of these include:

1. What exactly are the conditions of the loan that is being guaranteed?
2. Who is the guarantor? Is it a company or an individual?
3. Does the guarantor have sufficient assets to repay the loan should that become necessary?
4. Has the guarantor obtained independent legal advice regarding the terms of the loan and the deed of guarantee?
5. How is the deed to be executed? If the guarantor is a company, who is permitted to sign on behalf of the company?
6. What are the payment terms and conditions?

Core Clauses in the Agreement

With mutual considerations on the aforestated, the rights and responsibilities with respect to the guaranteed loan shall be substantially described in an agreement entered into between the Financial Institution, as the lender, and the guarantor, which agreement shall provide the following clauses:

1. Guaranty

In this clause, the Guarantor unconditionally guarantees and covenants with the Lender that the Guarantor will duly and punctually pay to the Lender all debts and liabilities, present or future, direct or indirect, absolute or contingent, matured or not at any time owing by the Borrower to the Lender upon demand wherever incurred and whether incurred by the Borrower.

2. Contribution by Guarantors.

In an Agreement with multiple guarantors, the co-guarantors will express desire to allocate among themselves, in a fair and equitable manner, their obligations arising under the Guarantee Agreement.

3. Payment

In this clause, Guarantors will upon demand pay, or cause to be paid, in Cash, to the Lender, an amount equal to the sum of the unpaid principal amount together with accrued and unpaid interest

The clause will also provide for the amounts payable as of any date of determination or it will include an arrangement to make Aggregate Payments in installments.

4. Liability of Guarantors. 

In this clause, each Guarantor agrees that its obligations are irrevocable, absolute, independent and unconditional and shall not be affected by any circumstance which constitutes a legal or equitable discharge of a guarantor or surety other than payment in full.

5. Authority of Guarantors.

This clause establishes the capacity and/or powers of any Guarantor or its officers, directors or any agents acting or purporting to act on behalf of any of them.

6. Default and Enforcement

This clause often provides that if the Guarantor shall fail on demand to make payment pursuant to the Borrower’s Liabilities, the Lender may in its discretion proceed with the enforcement of its rights with litigious action to recover owing sums.

7. Set off and lien

This clause provides that the Lender may, at any time and without notice or demand and notwithstanding any settlement of account or other matter whatsoever, combine or consolidate any existing accounts including accounts in the name of the Lender of the Guarantor and set off or transfer any sum in satisfaction of any obligations or liabilities to the Lender by the Guarantor.

8. Release and Discharge of the Guarantee

After all moneys payable by the Borrower to the Lender have been paid in full, the guarantee in the Agreement shall cease and become null and void and the Lender shall, at the request and at the expense of the Guarantor execute and deliver a release to the Guarantor.

How can we assist you?

At Netsheria International, we have an experienced team of lawyers who can offer you legal assistance in drafting and reviewing your Guarantor Loan Agreements. Please contact us for our services via email or visit our website for more information on our services.

The post Key elements of a guarantor loan agreement appeared first on Netsheria.