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Key legal advice includes drafting, advice for guarantors, enforceability, disputes.

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.

Cancellation –  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.

Is the 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).

Are there any loopholes or ways to get out of personal guarantees?

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.

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

Joint & several liability for personal guarantees

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.

Contact us for expert solicitor advice on any aspect of personal guarantees, whether the wording needed for a personal guarantee, advice on whether a guarantee is legally valid or where there is a legal dispute over a personal guarantee.