Personal guarantees on commercial mortgages in BC
The question every business borrower asks: do I have to sign personally, and can I limit it? This page explains how lenders approach it. It is not legal advice, so get independent legal advice on any guarantee before you sign.
The short answer
Most BC commercial lenders ask the people behind the borrowing company to personally guarantee the mortgage, but the size, the people who sign and when the guarantee can fall away are often negotiable, especially on lower leverage, stabilized property.
| Guarantee type | What you are on the hook for | When lenders ask for it | What you can negotiate |
|---|---|---|---|
| Full personal guarantee | The whole loan, plus costs, if the borrower cannot pay | The default on most conventional files | Who signs, and a release once the property stabilizes |
| Limited or capped guarantee | An agreed amount or share of the loan | Stronger files with lower leverage | The size of the cap and when it reduces |
| Joint and several guarantee from several shareholders | Each signer can be pursued for the whole amount | Companies with more than one owner | Who signs, and how you split it in a shareholder agreement |
| Corporate guarantee from an operating company | The operating company's assets stand behind the loan | Owner occupied deals where the business occupies the property | Using it in place of, or alongside, personal guarantees |
| Limited recourse or non recourse loan | Mainly the property, with narrow personal exceptions | Strong, low leverage, stabilized files | Which exceptions apply, so read them closely |
Why lenders ask
The borrower on a commercial mortgage is usually a holding company or a single purpose company that owns the property and nothing else. If the property fails, the company has no other assets to fall back on. The guarantee puts the people behind it on the hook.
Lenders also read the guarantors' net worth and liquidity as part of the application, so the guarantee is part of how the file qualifies, not just a signature at the end. See commercial mortgage requirements in BC for the full list.
Joint and several, in plain English
When several shareholders each sign, the lender can usually pursue any one of them for the whole amount, not just their share. The lender does not have to divide the debt the way you divided the company.
Shareholders should settle between themselves, in a shareholder agreement, who bears what if a guarantee is ever called. Your lawyer can explain how that works.
What is actually negotiable
These are asks a strong file can make, not defaults. Whether a lender agrees depends on leverage, the property and the people behind the borrower.
- Capping the guarantee at an agreed amount or a share of the loan.
- Limiting who signs, rather than every shareholder.
- A release once the property stabilizes or the loan is paid down, often called a burn off.
- Carving out a spouse who has no interest in the company.
- On owner occupied deals, a corporate guarantee from the operating company instead of individuals.
Insured and institutional loans
Insured multifamily loans and some institutional lenders set their own recourse rules, so ask early what will be required. See CMHC insured commercial financing and multifamily financing.
Before you sign
Get independent legal advice, and read the guarantee as carefully as the commitment. Questions to ask your lawyer:
- Does this guarantee cover only this loan, or all present and future debts to this lender?
- Is it capped, and if so, does the cap include interest and costs?
- Does it stay in place if I sell my shares, and what would a written release need to say?
- If several of us sign, can the lender pursue me for the whole amount?
- Is there any condition under which it falls away?
When it bites
If the loan defaults, the lender can look to the guarantors as well as the property. The process is described on our lender demand letter page.
Personal guarantee questions.
Related reading
Let's fund your next deal
Send the deal and tell us who owns the company. We will tell you what guarantee lenders are likely to ask for and where there is room to negotiate.