The residual value of a leased asset can be guaranteed by the lessee or a party related to the lessee or unguaranteed.  If the value of the asset and/or the financial condition of the prospective lessee is insufficient to justify the investment in the lease, guarantees will commonly be required in order to enhance the acceptability of a lease transaction.  Besides providing the lessor with an alternative means of recovering the investment in the lease, a guarantee increases the probability of lessee and guarantor cooperation on a problem lease.

A guarantee may be limited to a specific monetary amount or transaction or unlimited and typically covers either:

    1. The lessee’s obligations to the lessor under one or more specific lease agreements; or
    2. All of the lessee’s current and future obligations to the lessor.

In leasing, a guarantee is typically a payment and performance guarantee (P&P guarantee), enabling the lessor to seek payment from the guarantor without first having to exercise any default rights and remedies against the lessee, the leased asset or any collateral.  Most P&P guarantees provide that the guarantor absolutely, unconditionally and irrevocably guarantee prompt and full payment and performance of the lessee’s obligations to the lessor.

Some guarantees limit the ability of the lessor to have the full benefit of the guarantee.  A springing guarantee is effective only on the occurrence of a specified event, such as the lessee’s entering bankruptcy proceedings, fraud or waste of leased property by the lessee.  A collection guarantee generally cannot be enforced until the lessor has obtained and sought to enforce a judgment against the lessee or disposed of the leased equipment and other collateral securing the lessee’s obligations.

Lease Default Guarantees
P&P Guarantee Unconditional upon Contract Breach
Collection Guarantee Conditional upon Judicial Judgement

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