Does Your Customer’s Personal Guarantee Protect Future Transactions?

Image of a hand signing an agreement to represent a personal guarantee.Many small business owners form corporations and limited liability companies to personally insulate themselves from the obligations and debts of their business. Requiring the owner or officer of a company to enter a personal guarantee provides protection against the insulation a corporation or limited liability company provides.

Many companies who sell products, especially on credit, require their corporate customers to execute both a credit application and a personal guarantee. With a signed guarantee, the seller has recourse against the owner/guarantor should they default on payment.

Specific Guarantees Versus Continuing Guarantees

The question then becomes whether the signed guarantee is a specific guarantee or a continuing guarantee. A specific guarantee is limited to one individual transaction. A continuing guarantee, however, is an agreement from the guarantor that continues to guarantee the primary obligor’s debts and applies to transactions already entered by the primary obligor (unless a provision is included that the guarantee does not apply or it is limited by its terms). The guarantor is liable even if several obligations are made, renewed, or repaid over time.

Continuing guarantees typically have the terms “present and future” or “for amounts due now and in the future.” The guarantor promises to guarantee the obligations of the original guarantor for transactions occurring now and in the future. Such guarantees do not have a time limit and are deemed valid for as long as the parties do business. The guarantor, however, can withdraw from the continuing guarantee for transactions that have not occurred by issuing a writing to the company providing the guarantee.

In New York, if there is a signed guarantee for an agreement and the underlying agreement is altered, the alteration will discharge the guarantor’s obligations unless the guarantor consents to the alteration. For example, if a lease agreement with a personal guarantee states the rent is $1,000.00 per month and then increases the rent to $1,500.00 per month in a subsequent lease amendment, the guarantor is not liable for the increased rent amount unless they sign a new guarantee consenting to the change.

It is important to note whether the guarantee is a continuing guarantee or a specific guarantee. If the guarantee does not include the requisite “present and future” language, the language could be deemed to only apply to the transaction for which it was executed. An additional guarantee would be needed for future transactions executed between the parties. If the terms of the underlying agreement have been altered, the guarantor will need to execute a new guarantee consenting to the alteration of the underlying agreement.

If you have questions about a personal guarantee, contact Frank, Frank, Goldstein, and Nager for a consultation.