Discharge of guaranty upon sale of guarantor: Overview, definition, and example
What is discharge of guaranty upon sale of guarantor?
The discharge of a guaranty upon the sale of a guarantor refers to the termination or release of a guarantor’s obligation to back a loan or financial agreement once the guarantor sells the asset, business, or property that is tied to the original guarantee. A guaranty is a promise made by a third party (the guarantor) to take responsibility for a debt or obligation if the primary party (the borrower or obligor) fails to meet the terms of the agreement.
When the guarantor sells the asset or business that was securing the guarantee, they may seek to have their responsibility under the guaranty relieved or discharged, particularly if the sale satisfies or fulfills the terms of the underlying obligation. This can occur in a business transaction, real estate deal, or any other situation where the guarantor’s assets were used to secure a debt.
Why is discharge of guaranty upon sale of guarantor important?
Discharge of a guaranty upon the sale of the guarantor is important because it ensures that the guarantor is not unfairly held liable for obligations after the sale of the asset that was previously securing the debt. It provides legal clarity and protection for both the guarantor and the creditor.
For the guarantor, it ensures that they are no longer exposed to financial risk once the asset or property is no longer under their ownership. For the creditor, it’s important to understand whether the sale of the asset alters or terminates the terms of the original agreement and to ensure that the debtor or buyer is still responsible for any outstanding liabilities.
Understanding discharge of guaranty upon sale of guarantor through an example
Let’s say a business owner, John, has personally guaranteed a loan for his company by pledging his personal property as collateral. The loan agreement stipulates that if the business fails to repay, John will be responsible for the debt. Now, suppose John decides to sell his personal property to another party and is seeking to be discharged from his personal guarantee on the loan.
If the loan agreement includes a clause that discharges the guaranty upon the sale of the secured asset, John can ask the lender to release him from his obligations. This may be contingent on the sale satisfying the debt, either by paying off the loan or by transferring responsibility to another party who assumes the loan obligations.
If John sells the property for enough to pay off the loan, the discharge of the guaranty will release him from any further responsibility. However, if the sale does not cover the full amount of the loan, the lender may require that John or the new owner continue to guarantee the remaining balance.
Example of a discharge of guaranty upon sale of guarantor clause
Here’s how a discharge of guaranty upon sale of guarantor clause might appear in a loan or guarantee agreement:
“In the event that the Guarantor sells, transfers, or otherwise disposes of the property, business, or assets securing this guarantee, and such sale results in the satisfaction or full payment of the underlying debt, the Guarantor shall be released from all further obligations under this Guarantee. The release of the Guarantor shall be effective only upon confirmation that the sale proceeds have been used to satisfy the full amount of the debt, or as otherwise mutually agreed upon by the Guarantor and the Creditor.”
Conclusion
Discharge of guaranty upon the sale of the guarantor is an important legal concept that protects the guarantor from ongoing liability once they have divested the asset that was securing the loan or obligation. It helps ensure fairness in transactions and clarifies the terms under which a guarantor may be released from their obligations. Both parties—guarantor and creditor—must clearly understand the terms of the guaranty, the sale, and the conditions for discharge to avoid misunderstandings and legal complications. This provision is especially relevant in business and real estate transactions, where assets frequently serve as collateral for financial agreements.
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.