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Legal advice on personal guarantees

Guarantors are often connected parties such as company directors or business associates and family members. We advise both clients requiring guarantees and guarantors needing to understand and perhaps negotiate their potential liabilities.

Risks of entering into a personal guarantee

If you are asked to be a guarantor for a tenant then you need to be aware that you expose yourself to significant financial risk if the guarantee is ever enforced as you will be expected to step into the shoes of the tenant in the event of a default.

A prudent guarantor will seek to limit liability before taking on responsibility which may include the following:

Early warning/ participation in  Decision Making Process – if you have cause to be concerned about the tenant’s business then you should ensure that you are involved in the businesses decision making process. By having a “hands on” approach you can reduce the risk of the guarantee being called upon. One way that guarantors manage to do this is by having voting shares in the business.

Continuing Security -Whilst not necessarily an issue with a lease guarantee, another very common use of personal guarantees is for bank loans to businesses. Such guarantees may be required from small company directors. The standard wording in these forms of guarantee generally commits the guarantor to continuing security. In effect, this means that, if the guarantee is linked to a bank loan which is paid off in full, the guarantee will then still apply to any other borrowings unless and until the guarantor formally cancels it. Therefore, it’s crucial for a guarantor to be aware of this and to cancel the guarantee as soon as possible.


A guarantor should always consider exit terms and cancellation. Some guarantee documents will require formal cancellation by a tenant, especially bank guarantees, and in some cases guarantees can apply to future borrowings, so care should be taken in this regard also.


If there is a default is a personal guarantee enforceable?

In many cases, it is easy to be clear that there has been a default which will then possibly trigger liability under a personal guarantee. For example, where rent has not bee paid or a bank loan payment has not been met.

However, default can also occur in many other ways in complex documents such as bank loans or commercial leases. A personal guarantor should be careful to try and limit events of default which trigger liability under a guarantee to clear instances as otherwise he or she may be liable for technical breaches (defaults).

Is guarantee enforceable where underlying contract changed?

If the underlying contract has been varied without the consent or knowledge of a guarantor and where there is no clear clause in the contract and guarantee stating that variations do not need the guarantors approval or knowledge (obviously the guarantor should seek to refuse to agree to such a clause because it exposes him or her to even more liability which he or she has no control over), the guarantee may not be enforceable, so it is always worth checking this and the possibility of a defence to any claim based on the guarantee no longer being enforceable.

It may also be possible to challenge the wording of a guarantee generally as being unfair. Specific legal advice should be sought on this issue as each case will tend to turn on it’s own facts but a negotiating position may be created by the possibility of a defence based on the terms being unfair.

The courts will assess the unfairness of a contractual term, taking into account the nature of the goods or services for which the contract was concluded and by referring, at the time of conclusion of the contract, to all the circumstances attending the conclusion of the contract and to all the other terms of contract or of another contract on which it is dependent.

Enforcement of a personal guarantee

Guaranteeing what? What constitutes default?

For a guarantor to become liable, there must be a default by the primary debtor.

Taking the example of a commercial lease, most guarantors will understand and potentially reluctantly agree that, having given a guarantee, if the tenant defaults in paying rent, the guarantee may kick in. But what about where there are no rent arrears, but the Landlord claims some other form of default, such as non-payment of service charges, or dilapidations when the lease ends? The tenant may dispute these aspects. Such claims can be very sizeable, and it is important, wherever possible, for a prospective guarantor to try and avoid guaranteeing anything other than main liabilities, which are quantifiable such as rent. Better still, if a guarantee can be limited in terms of amount or time, by being capped, this is  definitely worth negotiating for.

Joint & several liability

Be aware that if you are guarantor with other directors, shareholders or third parties, the party with the benefit of your guarantee does not have to pursue all guarantors equally or at all. They may opt to simply go after the easiest or most solvent or vulnerable party. Consequently, cross indemnities are important so that if you are compelled to pay out alone or in higher proportion for guarantee liabilities, you can then claim back proportionately from other guarantors.


In the property sector especially, guarantors play an important role both with commercial and residential property (particularly in the current market). If you need expert advice, get in touch with us.


A prudent landlord will want to ensure that if their tenant is unable to pay the rent then they have an alternative party to pick up the bill. This is particularly the case where the tenant is a small organisation or one which the landlord has not done business with previously.

Rent Deposit

Ensure that the tenant leaves a rent deposit with the landlord and ensure you see a copy and understand any circumstances where the Landlord can use the deposit for reasons other than rent arrears and seek to ensure that the guarantee only become operative after a rent deposit has been lawfully used. A rent deposit will provide the landlord with a safety net that can be called upon if the tenant cannot make the next rent payment. The sum of the rent deposit will be negotiated by the parties at the outset and is usually for one term; so if the rent is payable quarterly then the rent deposit would usually be three months rent.

Negotiate with the Landlord

Some landlords may be prepared to limit either the term of the guarantee or cap it at a certain level.

Review the Lease

You should not under any circumstances act as a guarantor without having reviewed the lease and sought independent legal advice on the same. A key issue may be whether you are guaranteeing only rent or all the obligations of the tenant which would be potentially far more onerous, especially with a commercial lease.

Also, what happens if the lease is terminated, assigned (transferred) or there is an underlease – what will your position be in those circumstances ? No two leases are likely to be the same and as the guarantor will have to step into the shoes of the tenant in the event of default, it is wise to be clear on what you are entering into.