Deferral of guarantors’ rights: Overview, definition, and example
What is deferral of guarantors' rights?
Deferral of guarantors' rights refers to a situation where a guarantor agrees to temporarily waive or postpone their right to demand repayment from the primary borrower or obligor. In other words, a guarantor who has provided a guarantee for a loan or obligation typically has the right to seek reimbursement from the borrower if the borrower defaults. However, through the deferral of guarantors' rights, the guarantor agrees to delay the exercise of this right for a specific period or under certain conditions, usually as part of a negotiated agreement.
This deferral is often included in financing arrangements or agreements where the borrower is facing temporary financial difficulties, and the guarantor agrees to allow the borrower more time to fulfill their obligations before the guarantor steps in to cover the debt. It may also be used to provide flexibility in circumstances such as business restructuring or extended payment terms.
Why is deferral of guarantors' rights important?
The deferral of guarantors' rights is important because it can provide temporary relief to borrowers who are facing financial strain. By allowing the guarantor to delay their right to demand repayment, the borrower may have the opportunity to resolve their financial issues, restructure the loan, or improve their business operations without the immediate threat of the guarantor stepping in to repay the debt.
For guarantors, this provision is often included to maintain a good relationship with the borrower or to accommodate temporary cash flow issues, with the expectation that the borrower will be able to meet their obligations eventually. It is an essential tool in negotiating flexible terms for distressed borrowers, and it provides a level of protection for both parties during challenging financial times.
Understanding deferral of guarantors’ rights through an example
Imagine a company, ABC Ltd., that has borrowed money from a lender, and the loan is personally guaranteed by the company's owner, John. Due to an unexpected downturn in the business, ABC Ltd. is unable to meet its monthly payment obligations. The lender and John agree to a deferral of John’s rights as a guarantor, meaning John will not demand repayment from ABC Ltd. for the time being, even if the company defaults on the loan.
The deferral might last for six months, during which time ABC Ltd. can attempt to stabilize its finances and make the necessary payments. If, after the deferral period, ABC Ltd. still cannot meet its obligations, John would then have the right to demand repayment of the loan, as originally agreed.
An example of a deferral of guarantors' rights clause
Here’s how a deferral of guarantors' rights clause might appear in a loan agreement or guarantee contract:
“Notwithstanding any provision in this Agreement, the Guarantor agrees to defer their right to seek reimbursement from the Borrower for any amounts paid under this Guarantee for a period of six months from the date of default. During this deferral period, the Guarantor will not take legal action or demand repayment from the Borrower. The deferral may be extended upon mutual written consent of the parties.”
Conclusion
The deferral of guarantors' rights is a provision that allows for temporary flexibility in a guarantee agreement. It allows the guarantor to delay their right to demand repayment from the borrower, providing the borrower with additional time to resolve financial difficulties or restructure their obligations. This provision is often used in cases where the borrower is facing temporary challenges but is expected to recover and fulfill their obligations eventually. By deferring the guarantor’s rights, both parties may benefit from a more manageable financial situation in the short term, while preserving the guarantor’s ability to enforce their rights at a later time.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.