Guarantee Survives Expiry of Commitment Letter

The need for careful drafting is the lesson to be learned from a recent decision. A corporation had obtained a $3 million commercial mortgage from the lender in connection with the purchase of a waterfront property, marina and hotel. The full loan was repayable once the 10-month term expired, and it was supported by several unconditional guarantees provided with independent legal advice. The guarantors and the borrowing corporation each executed a mortgage commitment letter, which contained a clause that it was the “entire agreement” between them. However, issues arose as to the fitness of certain buildings for development, so the commitment letter expired before the lender advanced the borrowed funds. Still, the parties proceeded on the assumption that the transaction would proceed if certain conditions were met, and when it did close the mortgage specifically referred to the commitment letter as being the basis for the corporation’s indebtedness. The lender later sued on both the payment covenant in the commitment letter, and on the guarantees.
The court found that the terms of the guarantees were clear and unambiguous: their wording rendered them unaffected by the expiry of the commitment letter. Instead, they were effective regardless of any loss suffered in respect of the underlying security. As the court observed, there was no evidence to the contrary: “…the record is bereft of any document that suggests that the guarantors advised anyone, after the closing of the transaction, that they considered their guarantees at an end following the expiry of the commitment letter.”
Moreover, the corporation was aware of the “entire agreement” clause, and both parties were sophisticated and had entered into the transaction “with their eyes open”. The guarantors had agreed to guarantee the corporation’s indebtedness to the lender no matter how it arose, and regardless of any alterations in the terms of the arrangement between them (including the expiry of the commitment letter, and issues as to the property’s fitness for development). The lender was accordingly entitled to summary judgment for repayment of the loan and for payment under the guarantee. See Carevest Capital Inc. v. Belle Harbour Developments Inc., 2009 (ON S.C.)