- Traps for the Unwary: Guarantors & Co-Lessees - A Rose by Any Other Name
- May 12, 2014 | Authors: Jonathan Fleisher; Patience Kalu Omokhodion
- Law Firm: Cassels Brock & Blackwell LLP - Toronto Office
At Cassels Brock, we are regularly asked by equipment lessors if it is better to structure a transaction as co-lessees or as a lessee with a guarantor. The classic example would be in a car lease where a parent is “signing” on behalf of their child. The parent will have no use of the car but will be fully obligated to make payments. We will call the parent in this example the Non-User Co-lessee. In essence, the Non-User Co-lessee is guaranteeing the payment. The question is: is the Non-User Co-lessee, at law, more than a guarantor? In response, our advice has been that a co-lessee structure is generally preferable but there was very little law focussing on this issue.
The recent case of GMAC Leaseco Corporation v Greg Jaroszynski (decided by the Court of Appeal for Ontario, October 29, 2013) has clarified this area of law.
1. a Non-User Co-lessee is not merely a guarantor and is held to the standard of being the primary obligor. It should be noted however, that the result may have been different if there was not an entire agreement in the lease; and
2. whether a person (corporate or individual) is a guarantor or a co-lessee, they both should be notified of and consent to material alterations to the terms of the equipment lease or guaranteed obligations unless they have contracted out of this protection. This includes any change to the risk and any change that might prejudice the guarantor or co-lessee, and includes renewals, extensions or other amendments to the equipment lease.
This certainty is good news for equipment lessors seeking to take steps to ensure that the terms of their agreements (including the obligation to return the leased goods or to pay for the residual value) bind all co-lessees and guarantors.
This decision will be of particular interest to those taking personal guarantees in the province of Alberta given the recent changes to the formalities required to establish a valid guarantee in Alberta under Alberta’s Guarantees Acknowledgement Act. (For further information, please see our e-alert called “Individual Guarantors in Alberta: Trap for the Unwary and Extra Cost” dated February 12, 2014.)
What This Means for Equipment Lessors
The key takeaways are that equipment lessors should always do the following:
1. Include the key clauses: Ensure the equipment lease agreements and any related guarantees contains a principal debtor clause and an entire agreement clause; and
2. Get it in writing: In order to ensure that all co-lessees and guarantors are bound by (and that guarantees will extend to) the terms of an amendment to the equipment lease, each co-lessee and guarantor should provide written consent to, and acknowledgement of, any material changes to the terms of the underlying contract.