Legal Definitions - revocable guaranty

A revocable guaranty is a legal promise made by one party (the guarantor) to be responsible for the debt or obligation of another party (the principal debtor) if the principal debtor fails to meet their commitment. The defining characteristic of a revocable guaranty is that the guarantor has the right to cancel or withdraw this promise, typically for future obligations, by providing notice to the creditor.

This means the guarantor's responsibility can be limited or terminated for debts incurred after the revocation takes effect. However, the guarantor usually remains liable for any obligations that arose before the revocation notice was given and became effective.

• Example 1: Business Expansion Loan

  A venture capitalist provides a revocable guaranty for a startup company's line of credit with a bank. The guaranty covers up to $1 million. The agreement specifies that the venture capitalist can revoke the guaranty with 30 days' notice, but they remain responsible for any funds already drawn by the startup before the revocation takes effect.

  This illustrates a revocable guaranty because the venture capitalist can withdraw their promise to cover future draws on the line of credit. However, they are still obligated for the money the startup borrowed before the revocation notice period ended.

• Example 2: Supplier Credit Terms

  A small manufacturing company provides a revocable guaranty to a raw material supplier for credit extended to its newly formed subsidiary. The guaranty allows the manufacturing company to revoke its promise for any new orders placed by the subsidiary after giving written notice to the supplier.

  Here, the manufacturing company can choose to stop guaranteeing future purchases made by its subsidiary. This provides flexibility, allowing them to limit their exposure if the subsidiary's financial health deteriorates, while still honoring commitments for materials already supplied.

• Example 3: Commercial Lease Renewal

  A parent company provides a revocable guaranty for a three-year commercial lease signed by its subsidiary. The guaranty agreement states that the parent company can revoke its guaranty for any lease renewals or extensions beyond the initial three-year term by providing six months' prior written notice to the landlord.

  This demonstrates a revocable guaranty because the parent company is not permanently bound to guarantee the lease indefinitely. They have the option to withdraw their financial backing for any subsequent lease periods, giving them control over their long-term liability.