Guarantees – Everyone Wants One and No One Wants to Give One

In today’s market, everyone wants someone else to guarantee something.  Lenders ask for guarantees from shareholders, partners and others. Landlords want parent entities or business owners to guarantee lease payments.  Buyers want guarantees from sellers of real property, businesses and goods and services.

Guarantees come in many shapes, sizes and flavors.  For a quick understanding of various types of guarantees, we’ve put together short definitions of some typical guarantees.  These are not examples of the actual wording, which themselves come in many styles and formats.  Before you execute any guarantee or any agreement containing a guarantee, you should consult appropriate counsel.

An absolute guaranty provides that the guarantor promises to pay or perform the obligations of the debtor upon the occurrence of an event of default (typically debtor’s default). If a guaranty does not contain words of limitation or conditions, it is typically construed as an absolute guaranty

A conditional guaranty requires the happening of some contingent event (other than the default of the debtor) or the performance of some act on the part of the creditor before the guarantor will be liable.

A payment guaranty obligates the guarantor to pay the debt at maturity (which may arise due to an event of default). Upon the occurrence of a debtor’s default, the guarantor’s obligation becomes fixed and the creditor does not need to make a demand on the debtor

A collection guaranty is a guarantor’s promise that if the creditor cannot collect the claim with due diligence, usually after suit (and exhaustion of remedies) against the debtor, the guarantor will pay the creditor

A performance guaranty obligates the guarantor to perform some obligation on behalf of the debtor for the benefit of the creditor

A continuing guaranty is a guaranty that is not limited to a single transaction but contemplates a future course of dealing which may encompass a series of transactions, may be for an indefinite period and/or may be intended to secure payment or performance of an overall debt of the debtor. As such, a continuing guaranty may include subsequent indebtedness without new consideration

A guaranty is a restricted guaranty when it is limited to a single or limited number of transactions, to a certain part of the debt obligation and/or to a certain period of time

A downstream guaranty is a guaranty by a parent corporation for the obligations of its subsidiary. In this scenario, a lender will look to the parent corporation to back up the debt of a subsidiary corporation due to the parent corporation’s superior assets and financial condition

An upstream guaranty is a guaranty by a subsidiary corporation for the obligations of its parent corporation.  Typically, a creditor will require an upstream guaranty when debtor’s, i.e. the parent corporation’s, only assets are the stock of a subsidiary, and the subsidiary owns assets used as collateral to secure the credit obligations

A cross-stream guaranty is a guaranty among affiliated corporations, whose stock are both owned by the same parent