Guarantee: when is the guarantor liable?

You have been asked to stand as guarantor (kautionist) for a family member, a friend or a business partner. It feels like a small favour; you sign, and the matter is settled. But a guarantee is not a formality. It is a serious legal and financial commitment that can leave you paying someone else's debt, with everything you own.

This guide explains what a guarantee is, the two main types, when the guarantor is liable, and what a guarantee declaration should contain.

What is a guarantee?

A guarantee (kaution) is a form of security in which a third person (the guarantor) undertakes to pay a debt if the principal debtor (the person who borrowed the money or entered the agreement) does not pay.

Guarantees are typically used for:

• Residential letting: a parent guarantees for their child as tenant
• Bank loans: a friend or spouse guarantees a loan
• Commercial letting: a director or owner personally guarantees the company's lease
• Supplier agreements: a personal guarantee for a company's payment obligations

A guarantee differs from being a co-borrower: a co-borrower, like the debtor, is a direct party to the agreement. A guarantor is a secondary security; the guarantor is only liable if the principal debtor defaults on the obligation.

The two forms of guarantee

Simple guarantee

Under a simple guarantee, the guarantor is only liable subsidiarily. That is, the creditor must try to recover the debt from the principal debtor before the guarantor can be called on. The creditor must have exhausted its options for recovery from the debtor, for example through the enforcement court, before the claim is directed at the guarantor.

A simple guarantee is a weaker form of security for the creditor and therefore more favourable for the guarantor.

Guarantor-as-principal (selvskyldnerkaution)

The guarantor-as-principal form is the most used in Denmark and the most onerous for the guarantor. Here the guarantor is liable jointly and severally with the principal debtor.

That means the creditor can direct the claim straight at the guarantor, without first attempting recovery from the debtor. As soon as the payment deadline is passed, the creditor can choose to go after the guarantor, regardless of whether the debtor has funds or not.

Example: Jonas rents a flat, and his father Claus provides a guarantor-as-principal guarantee. Jonas does not pay rent for two months. The landlord can choose to demand the amount from Claus directly, without trying to recover from Jonas.

This form is the standard in most commercial and tenancy contexts.

When is the guarantor liable?

The guarantor is liable when:

1. The principal debtor defaults on the obligation (non-payment, bankruptcy and so on)
2. The guarantee declaration covers the specific obligation
3. The creditor makes a valid claim within any deadlines in the guarantee declaration

The guarantor's liability is not unlimited unless that is agreed. The guarantee declaration should state:

• A maximum amount for the guarantee
• Whether it applies to existing or also future debt
• Whether there is a time limit

The guarantor's rights

The guarantor is not without rights. Important rights:

Right of recourse: If the guarantor pays the principal debtor's debt, the guarantor can seek recourse, that is claim the money back, from the principal debtor. The right of recourse is well established, but can in practice be hard to use if the debtor is insolvent.

Information: The guarantor can require to be informed of the debtor's suspension of payments or bankruptcy.

Release on change: If the principal debtor's obligation is materially changed without the guarantor's consent, for example if the debt is increased or the term is extended, the guarantor can in some cases be released from liability.

What should a guarantee declaration contain?

A guarantee declaration should contain the following elements to be clear and binding:

1. The guarantor's identity

Full name, civil registration number and address. If the guarantor is a company, state the CVR number.

2. The creditor's identity

Who is the beneficiary: the bank, the landlord, the supplier? State the name and CVR number.

3. The principal debtor's identity

Who is being guaranteed for? Name and civil registration or CVR number.

4. The underlying obligation

Describe what the guarantee covers:

• A specific loan (loan amount, interest rate, term)
• A lease (the address of the property and the rent)
• A commercial agreement (type and amount limit)

Vaguely worded guarantees ("all future obligations") are onerous and should be avoided, unless you are aware of the consequences.

5. The guarantee's maximum amount

State the maximum amount the guarantor is liable for. Guarantees with no ceiling can in principle expand to cover all the debtor's obligations towards the creditor.

6. The type of guarantee

State explicitly whether it is a simple guarantee or a guarantor-as-principal guarantee.

7. The guarantee's duration

Does the guarantee apply for a fixed period, or does it run until the principal debtor's debt is fully repaid? State an end date if relevant.

8. The guarantor's signature

The guarantee declaration is only binding when the guarantor has signed expressly and voluntarily. A signature under pressure or without understanding of the consequences can in rare cases be challenged.

Guarantees in business: the director's personal guarantee

In business, especially with companies (ApS, A/S), banks and landlords often require the company's owner or director to provide a personal guarantor-as-principal guarantee for the company's obligations.

This is an important point: liability in an ApS is formally limited, but a personal guarantee can in practice partly set aside that limitation of liability for the specific debt.

As a director or owner you should:

• Require a clear ceiling on the guarantee's maximum amount
• Insist that the guarantee is released once the company's finances are consolidated
• Consider insurance cover that can include certain guarantee or liability claims

Guarantees in residential letting

Parents frequently guarantee for their children in residential tenancies, partly because young tenants rarely have the required deposit, and partly because landlords feel more secure with an adult guarantor.

In residential letting, the landlord may under the Rent Act require at most a deposit equal to 3 months' rent and prepaid rent for up to 3 months. A guarantee is typically provided as security for the tenant's obligations within an agreed framework. The starting point is that you as guarantor are liable for the agreed amount, including unpaid rent and repair costs, within the guarantee's ceiling.

Terminating and being released from a guarantee

The scope for getting out of a guarantee depends on what debt is involved.

For debt that has already been incurred, the guarantor as a rule cannot terminate the guarantee unilaterally; it requires the creditor's consent. The creditor is not obliged to release the guarantor simply because it is wished.

For an ongoing guarantee that also covers future debt (for example a guarantee for an overdraft facility), the guarantor can, however, normally terminate the guarantee on reasonable notice, so that it no longer covers new debt incurred after the termination. The guarantor remains liable for the debt already incurred at the time of termination.

The guarantee ends automatically when:

• The principal debtor's debt is fully repaid
• The agreed end date of the guarantee period is reached
• The creditor expressly releases the guarantor

Frequently asked questions about guarantees

Can my spouse terminate my guarantee declaration?

No, unless the spouse has also signed. A guarantee declaration is personal and can only be terminated by the guarantor themselves, and for debt already incurred only with the creditor's consent.

Does the guarantee declaration need to be notarised?

It is not a general requirement. Some types of security, for example a mortgage over real property, may require registration, but a plain guarantee declaration requires neither notarisation nor registration.

What happens if the principal debtor goes bankrupt?

In bankruptcy the claim is filed in the debtor's bankruptcy estate. The creditor can choose to direct the claim at the guarantor while the estate is being administered. The guarantor who pays steps into the creditor's place in the estate (subrogation).

Is there a limitation period for guarantee claims?

Yes. Claims against the guarantor become time-barred under the ordinary limitation rules, as a rule 3 years from the due date of the claim (section 3 of the Limitation Act). The creditor must therefore act within the deadline. If the claim is established by judgment or settlement, or rests on a debt instrument, a longer period may apply.

Can the guarantee be transferred to a new creditor?

Yes, on the creditor's assignment of the claim. The guarantee normally follows as accessory to the principal debtor's obligation.

Conclusion

A guarantee is a serious legal responsibility. Before you sign a guarantee declaration, you should make sure you understand the type of guarantee (simple or guarantor-as-principal), the maximum amount you are liable for, and when the guarantee ends. A clear, written guarantee declaration with these elements protects both parties and prevents disputes.

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The content of this article is for guidance only and does not constitute legal advice. Consult a lawyer before signing a guarantee declaration.