GuarantorsCo-Signor or Guarantor Clauses May Be Unenforceable Unless Properly Drafted

Typical within a Residential Tenancy Agreement is a 'guarantor' clause whereas a person, commonly the parent or parents of a young tenant, agree to guarantee the debts and liabilties of the tenant.  The intent and desire of the landlord is to obtain the assurance that the guarantor will pay on behalf of the tenant if the tenant fails to pay rent, or if the tenant causes damage to the rental unit.  Regretably, landlords often fail to properly prepare lease contracts as well as fail to properly pursue the claims as against guarantors.

Two common issues where landlords 'drop the ball' occur when:

  • The landlord attempts to bring a claim in the Small Claims Court as against the guarantor without first obtaining an Order as against the tenant from the Landlord Tenant Board; and
  • The landlord fails to properly draft the lease so as to adequately define the guarantee obligations of the guarantor. 

In regards to principles relating to guarantors, a general concept of 'guarantee' is that the person who acts as a guarantor is liable on behalf of the person for whom the guarantee was provided but only if the person for whom the guarantee was provided is firstly liable.  The liability of the guarantor co-exists with the liability of the primary debtor and without liability owed by the primary debtor the guarantor is without liability; Stamm Investments Limited v. Ryan, 2015 CanLII 52577 at 21.  Stated more clearly using a tenancy example, if Sally rents an apartment from ABC Properties Inc.  and ABC Properties Inc.  obtains a 'guarantee' from the parents of Sally, the parents of Sally become 'guarantors' who shall pay on behalf of Sally in the event that Sally becomes liable.  However, the key word is that Sally must be liable.  A landlord, ABC Properties Inc.  in this example, must first pursue liability against Sally and be awarded an Order from the Landlord Tenant Board, if indeed the matter is within the jurisdiction of the Landlord Tenant Board.  If ABC Properties Inc.  skips the step of pursuing liability against Sally, in the proper forum, then ABC Properties Inc. should fail in any subsequent attempt to seek payment from the parents of Sally.  Quite simply, the parents of Sally, as guarantors, cannot pay liability on behalf of Sally for a liability not owed, or at least not yet owed, by Sally.

An additional challenge that a landlord may face is where the landlord failed to adequately define the obligations within the guarantee provided by the guarantors.  Where a landlord fails to adequately define the obligation, the landlord will be unable to enforce the guarantee upon the guarantor; Times Square v. Shimizu, 2001 BCCA 448:

[26]   The plaintiff landlord prepared the document.  It failed to include language which spelled out the obligation to be assumed by the guarantor.  I cannot accept that in the absence of any such language it should be implied that the obligation consists of guaranteeing all the obligations of the tenant.  In the final analysis, although Mr.  Shimizu, senior, indicated a readiness to assist in the leasehold arrangements by acting as a guarantor, the landlord did not actuate that intention by settling the applicable terms.

Using the example involving Sally and the parents of Sally, assume for this explanation that the lease agreement simply contained signature lines denoting "Guarantor(s)" where upon the parents of Sally provided signatures.  Surprisingly, it seems that landlords will commonly draft a lease agreement, rather than obtain help from an experienced lawyer, and the landlord wrongfully presumes that including the word "guarantor" sufficiently imposes a blanket obligation upon the guarantor.  As the landlord often learns the hard way, the word "guarantor" fails to impose a blanket obligation upon the guarantor and some clause, or clauses, within the lease agreement are required to define the specifics of the obligation.

Furthermore, whereas a lease may, and usually will, contain an express period for the tenancy, and a guarantor may agree as a co-party to a lease to accept certain defined liabilities as stated within the lease, unless expressly stated that the guaranteed terms will extend into any subsequent period, the period of guarantee will expire at the end of the lease date without presumption that the guarantee continues should the tenancy continue such as commonly occurs in practice and per the statutory provisions providing that residential tenancies convert to a 'month-to-month' arrangement following expiry of a lease.  This was stated in Li v. Evangelista, 2018 CanLII 82867 where it was said:

[55]  Glenn Evangelista signed the rental agreement as guarantor but did not sign any further guaranty as contemplated by the guaranty clause in the rental agreement.  In any event Glenn did not guaranty any future extensions of the lease, nor to the statutory  month-to-month tenancy in 2014.  He is not liable for the special damages awarded.

Accordingly, where a one year lease period expires, and the tenant remains within the unit so to continue as a monthly tenancy as provided by the security of tenure provisions within the Residential Tenancies Act, 2006, S.O.  2006, Chapter 17, section 37, the obligations of the guarantor, unless expressly stated within the original lease, or other applicable contract, cease.  The law avoids presuming that the guarantor is endlessly obligated.

Jurisdiction of Proceeding

A further point of common confusion can also arise as to whether the Landlord Tenant Board or the Small Claims Court holds jurisdiction for claims brought against a guarantor who acted as a 'co-signor' upon a lease.  The answer to this legal question was also provided within the Stamm Investments Limited case where it was stated by Deputy Justice Winny while sitting for the Small Claims Court:

18.  I accept the plaintiff’s submission that the Landlord and Tenant Board has no jurisdiction over guarantors.  In other words where a landlord is owed arrears of rent by tenants it can proceed before the board against the tenants but the board cannot make an order against the guarantor because a guarantor is not a “tenant” within the meaning of the Act: 501606 Ontario Ltd.  v. Manbauhar, 1998 CarswellOnt 6412 (ORHT).

19.  Accordingly I find that the board’s exclusive jurisdiction under s.  168(2) of the Act cannot oust the court’s jurisdiction to entertain a claim against a guarantor of a residential tenancy.

Summary Comment

Leases should be properly drafted to ensure that the liabilities imposed upon a guarantor clearly co-exist with the liabilities of tenants.  If clauses fail to clearly state so, liability upon the guarantor is without presumption as co-existing the liabilities of the tenants.  Where leases do show that liabilities will co-exist, the liability of the tenant must first be declared.  Furthermore, if the legal issue of liability upon the tenant falls within the exclusive jurisdiction of the Landlord Tenant Board, the Landlord Tenant Board must declare such liability within an Order prior to a landlord pursuing a guarantor within the Small Claims Court whereas the Landlord Tenant Board is without jurisdiction over a guarantor and therefore the landlord must bring claims against the guarantor at the Small Claims Court; however, whereas a claim against the guarantor must 'co-exist' with the liability of the tenant, it is necessary that liability of the tenant must also exist.  If the landlord skips or misses the step of establishing liability against the tenant, within the proper forum, a claim against the guarantor will likely fail.

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