Mortgage Broker

legalease 28 | winter 2018 cmba-achc.ca CMB MAGAZINE Is the third-party debtor in your deal a covenantor or a guarantor? Not being clear could cost you big-time By Ray Basi, L.L.B., staff, Education and PoLicy REviEw Satisfaction Not Guaranteed a lender sometimes agrees to lend mortgage funds only if a person in addition to the borrower is legally responsible to comply with the borrower's obligations under the mortgage, including the obligation to repay the outstanding balance. e additional person would be either a covenantor or a guarantor. A covenantor and a guarantor are not the same thing, and unexpected outcomes can result from confusing the two. For example, in some circumstances a court in a foreclosure action will not make an order against a guarantor to pay a mortgage that it would have made had the person been a covenantor. Key Distinctions A covenantor is a primary debtor and is responsible to comply with the borrower's obligations under the mortgage in the same way as if the covenantor was in fact a borrower. e covenantor is responsible for the obligations both alone and together with the borrower. On the other hand, a guarantor is a secondary debtor, a surety, and is responsible for observing the borrower's obligations under the mortgage only if the borrower (the primary debtor) fails to observe them. e lender must exhaust remedies against the primary debtor before seeking recovery from the guarantor. A covenantor's obligation is not dependent on the borrower's obligation being enforceable. If the borrower does not remain liable for an obligation, the covenantor may nevertheless remain liable for it. A guarantor's obligation, meanwhile, is dependent on the borrower's obligations being enforceable. If the borrower does not remain liable for an obligation, then neither does the guarantor. Covenant or Guarantee Agreements Agreements oen use the terms covenantor or guarantor as if they were interchangeable; sometimes the terms are used within the same document inconsistently. For example, the body of the agreement might impose covenantor obligations on a person, but the signature line may indicate the person as being a guarantor. e obligations taken on by the agreement determine whether a person is a covenantor or a guarantor. Certainly, the agreement can broaden or narrow the person's obligations than would otherwise be the case. For example, the agreement might state that the guarantor's responsibility applies only to repayment of the mortgage amount and not to other obligations of the borrowers (such as maintaining the security property), or it might specify that the lender must give the guarantor a certain type or length of notice that the borrower has breached the agreement before action can be taken against the guarantor. Courts interpret these agreements in the same way they interpret other agreements. If the interpretation of the agreement is that the person is agreeing to pay only if the borrowers do not pay, then the agreement is a guarantee. If the person is liable to pay regardless, the agreement provides for a covenantor. e label or headings the parties assign to the obligation is a factor but does not by itself determine whether the obligation is a covenant as opposed to a guarantee. In some cases, the agreement can have the result of elevating a person who signs as a guarantor to having the responsibilities of a covenantor. Agreements need to be carefully structured and reviewed to ensure the result is as the parties mutually intend. Practical Issues If a person is, based on the wording of the agreement, found to be a guarantor, the lender will have to exhaust all remedies against the borrower before proceeding against the guaran- tor. If the person is a covenantor, the lender can proceed against the person from the outset. If not otherwise specified by the agreement, generally a guarantor must be given reasonable notice of a default to perform before enforcement can be taken against the guarantor. is can considerably delay, for example, foreclosure proceedings. Takeaways Care should be taken to determine whether the parties are intending the person to be a guarantor or a covenantor. e language in the agreement should be consistent in establishing the obligation of the third party as either a guarantee or as a covenant. It is easier for a lender to enforce covenants than guarantees. Lenders should favour obtaining covenants. ird parties being obligated should favour taking on obligations as a guarantor rather than a covenantor. Mortgage brokers should favour the third party taking on obligations as a covenantor or as a guarantor, in accordance with the role of the client in the transaction." s

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