Guarantees or Indemnities ~ Which Do You Prefer?

Despite the fact that they are both in common usage, the answer should be clear: Indemnities.

 In law, a guarantee is an agreement that C will perform IF B fails to do so. It is dependent, it is contingent. It is a secondary obligation.

This means that A has to be aware of B’s failure to perform, notify B, then ultimately sue B. Once those steps are taken, B can then sue C on the guarantee.

An indemnity on the other hand is a direct and primary agreement. There are no first steps, no contingencies, no conditions precedent prior to recovery. An indemnity is a primary obligation. As soon as there is a lack of performance, A notifies B and C at the same time. C has a primary duty to fulfill the contract at this point. No waiting!

So, if you are drafting a Lease or an Offer to Lease, make absolutely sure that you are using a suitable clause. The third party standing up for the tenant must be an Indemnitor, and agree to primary liability. Having a guarantor, although it seems “nice”, is just not good enough. This would constitute negligence in most cases. The exception would be if the Landlord fully understood the differences and opted for the Guarantor instead. That would indeed be rare. And, if the Landlord did so agree then the Landlord would not have any complaints.

As it stands, most of the time, in my experience when the term guarantor is used, it is actually used in error or by mistake, the agent believing that the third party actor to have primary liability.

Be careful to choose the correct clause.

Brian Madigan LL.B., Broker

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