Personal Guarantee

A guarantee involves three parties: the creditor (a bank, landlord, seller or franchisor), the principal debtor (usually a corporation) and the guarantor, who promises to answer for the debtor's obligation if the debtor defaults. A personal guarantee is one given by an individual rather than a company.

Shareholders of an Ontario corporation are not normally liable for its debts. A personal guarantee is the most common way that protection is given up, and it is given up voluntarily, by contract. That makes it different from directors' liability, which arises by statute for items such as unpaid wages and source deductions, and from piercing the corporate veil, which courts reserve for exceptional cases. A creditor holding a guarantee does not need either: it simply sues on the promise.

In Ontario a guarantee must be in writing to be enforceable. Section 4 of the Statute of Frauds bars an action on a promise to answer for the debt, default or miscarriage of another person unless the agreement, or a note or memorandum of it, is in writing and signed by the person to be charged.

A true guarantee is a secondary obligation. The guarantor promises that the debtor will pay; liability generally depends on the debtor owing something, and the guarantor can usually rely on defences that affect the debt itself.

An indemnity is a primary obligation. The indemnifier promises to make good the creditor's loss directly, whether or not the debtor's obligation is enforceable. Lenders and landlords therefore draft "guarantee and indemnity" documents and add a principal debtor clause, which says the guarantor is liable as if it were the principal debtor. These clauses are meant to keep the guarantor liable even if the main obligation fails, so the label on the document matters less than what each clause actually says.

When a guarantor pays, Ontario law gives something back. Under section 2 of the Mercantile Law Amendment Act, a surety who pays the debt is entitled to an assignment of the creditor's judgments and security, can use the creditor's remedies against the debtor, and can recover a just proportion from co-guarantors.

Revoking a continuing guarantee, where the document allows it, usually stops liability for new advances only; debts already incurred stay covered. Selling your shares or resigning as a director does not end a guarantee. It continues until the creditor releases you, the debt is paid or the guarantee ends under its own terms.

Material variation without consent. The leading Canadian case is Manulife Bank of Canada v. Conlin, [1996] 3 SCR 415. A husband had signed his wife's mortgage as guarantor, and at the end of its term the loan was renewed at a higher interest rate under a renewal agreement that only she signed, without notice to him. A 4–3 majority of the Supreme Court of Canada held that he was released, both as guarantor and under the clause describing him as a principal debtor. The mortgage's guarantee clause kept the guarantor bound despite time being given for payment or changes to the interest rate, but the majority, reading it with the mortgage's separate clause on renewals and extensions, held that it did not bind him to a renewal for a new term that he had not signed. The majority added that any ambiguity in a guarantee should be construed against the lender that drafted it. The broader rule is that a guarantor is generally discharged when the creditor and debtor materially change the guaranteed obligation without the guarantor's consent, unless the guarantee clearly permits that kind of change.

The practical lesson cuts both ways. Modern bank, lease and franchise guarantees contain broad consent clauses precisely because of this rule, so a guarantor should not assume that a later amendment releases them. A creditor that wants certainty asks the guarantor to sign each amendment, renewal or increase.

What does not release a guarantor. The debtor's insolvency is the risk a guarantee exists to cover. Section 179 of the Bankruptcy and Insolvency Act provides that a bankrupt's discharge does not release a person who was a surety for the bankrupt. Lenders often ask a guarantor with no role in the business, such as a spouse, to get independent legal advice, which makes later challenges to the guarantee harder.

• Commercial leases. Landlords routinely ask principals of a corporate tenant to guarantee the lease. Caps and burn-off provisions are negotiable; see our guide to commercial lease negotiation. A guarantee usually survives an assignment unless the landlord releases it, which matters on a sale; see lease assignment vs. sublease. Franchise systems add a layer through the franchise head lease and sublease.
• Bank and CSBFP loans. Lenders to small corporations usually require owner guarantees. Under the Canada Small Business Financing Program, personal guarantees must be unsecured and, for loans made after March 31, 2014, are capped at the original loan amount plus judgment interest and enforcement costs.
• Business purchases. A seller lending part of the price through vendor financing will ask the buyer's principals to guarantee the note. The seller, in turn, should make the release of their own lease and loan guarantees a closing condition.
• Franchise agreements. Franchisors commonly require the individuals behind a franchisee corporation to guarantee the franchise agreement.

Lamba Law's free personal guarantee tracker totals your exposure across every guarantee you have signed and flags renewal dates, which is when a guarantee is easiest to renegotiate.

Marcus Chen and Leila Haddad each own half of a Brampton logistics company. In 2022 both sign joint and several continuing guarantees of the company's bank operating line, capped at $400,000 plus interest and costs, and both guarantee the warehouse lease. In 2024 Marcus sells his shares to Leila and resigns as a director. No one asks the bank or the landlord for a release.

In 2026 the company defaults with $310,000 owing on the line, and the bank demands the full amount from Marcus. He argues that the bank raised the line to $500,000 in 2025 without his signature. His lawyer advises that the guarantee's consent clause allowed the bank to change credit terms without notice, so the increase does not release him; the $400,000 cap only limits how much he can be asked for. Marcus pays, takes an assignment of the bank's security under the Mercantile Law Amendment Act, and pursues the company for indemnity and Leila for contribution.

The lease guarantee is different. The landlord and Leila had extended the lease five years at a higher rent without Marcus's signature, and his lease guarantee has no clause covering extensions. Marcus's lawyer takes the position that he is not liable for the extension term, relying on the material-variation rule from Conlin.