Q: Is it necessary to complete a new guaranty agreement every time you complete a new note or is it okay to reference existing guaranty agreement on a new note?
A: In determining the action a lender should take in originating a new loan to an existing borrower with the expectation that a current guarantor is also responsible for the new debt hinges on whether the existing guarantee is continuing.
If the existing guarantee IS NOT continuing, you must get a new guarantee from the current guarantor to obligate that party as guarantor on a new loan.
If the existing guaranty IS continuing you may be legally and technically correct and be able to legally enforce the existing continuing guaranty in the event of loss on the new loan. However, without any further action, the lender may be exposing itself to potential business and reputational risk in choosing to enforce the existing guarantee. For example, the guarantor may claim he or she was unaware of the existence or meaning of a continuing guarantee and deny responsibility. Lengthy and perhaps awkward litigation could follow.
At a minimum, consider amending the existing continuing guarantee to specifically include the new note. The amendment should be signed and dated by the guarantor, the borrower, and the lender.
Another and maybe less complicated action would be to get a new guarantee. Continuing guarantees are generally cumulative and changed terms and conditions in a new guarantee document will generally apply to both existing and new debt. If the cumulative effect creates borrower concerns, give careful consideration to modifications that specify to which loans(s) the changes apply.
As always, be guided by your institution’s policy and practices and the guidance of legal counsel in making a decision on this matter.
Course overview: Commercial Loan Documentation