PERSONAL GUARANTEES DRAFTED FROM £350+VAT
If you have been asked to sign a Personal Guarantee or need one drafting, please contact our expert solicitors. We offer a free 30 minute consultation and convenient flexible opening times. Tel: 02477 981545
What is a Personal Guarantee?
Let’s be clear what a personal guarantee is. It’s where a third party guarantees the obligations of the borrower. So, if the borrower fails to repay the loan, the guarantor becomes liable to pay.
People often misunderstand a personal guarantee, as they think it “guarantees” payment of a debt in the event of a default. That’s far from the truth because the guarantor may not have sufficient assets or the Personal Guarantee may have been drafted to limit the extent of the liability.
Personal guarantees are typically used when lending to a company, in which case the Directors of the company will often be asked to also give a personal guarantee in case the company defaults. This allows you to pursue the Director personally for repayment of the loan, so gives you a further level of protection.
Here we outline a number of questions we get when being asked about personal guarantees, whether that arises through drafting or litigation.
Should I lend based on just a Personal Guarantee?
This comes down to your risk/reward appetite and the amount involved. If you simply cannot afford to lose the money, you should really be looking at better security. There are different levels of security, such as a charge on a property or a debenture. We deal with the different levels of security on our Loan Agreements page (here) and you will also find a video on loan security in the video section.
One thing to be aware of, do not be enticed into lending money to an individual on the basis that they will also offer you a personal guarantee. This is because the borrower is already personally liable, so the Personal Guarantee adds no further protection.
Can a Personal Guarantee be restricted?
Yes, It can. It can be:
- Limited in time
- Limited to a specific amount
- Limited to part of the obligations of the borrower
Does a Personal Guarantee need to be in writing?
Yes. To avoid disputes over substance, it’s always best to put it in writing. It could be a formal contract, agreement or note. It must be signed by all parties. The personal guarantee will set out what the secondary liability is to the guarantor and make clear that the debtor has the primary liability.
How long does a Personal Guarantee last?
The liability of the guarantor will last as long as the borrower has the liability. Once the borrower satisfies the debt, the liability for payments ends for both borrower and guarantor.
When is a Personal Guarantee not enforceable?
In most cases, they become unenforceable only after the relevant limitation period expires.
If there are no restrictions in terms of time in the agreement itself, then if court proceedings are not commenced within 6 years for a contract or 12 years for a deed from the date of breach, the personal guarantee becomes unenforceable. But let’s talk sense here, what’s the chance of a lender allowing that to happen?
Can I get out of a Personal Guarantee?
There are some circumstances that can potentially be used to avoid liability under a personal guarantee:
- If the guarantor was substantially misled, perhaps by fraud or misrepresentation before it was signed by the guarantor there would be grounds.
- If the guarantor can show that the lender failed to explain something that goes to the heart of the relationship between the lender and borrower, such that if that had known, the guarantor they would not have agreed, there may also be grounds.
- There can be no liability if the guarantee was secured over a specific property that never existed.
- If there is a variation of the original agreement between the lender and borrower which the guarantor was not made aware of, for example an increase in the loan amount or an extension of time to pay the loan, then this would give grounds to avoid liability
Is it worth using a solicitor to see if a Personal Guarantee can be challenged?
This really comes down to the size of the liability and what you want to achieve. Rarely in litigation is a 100% recovery made. In reality, there is usually some wiggle room and scope for negotiation. Much will depend on the circumstances of the lender, as well as the terms of the agreement. If it turns out that the agreement was not drawn up properly by a solicitor in the first place and in line with your instructions, there could potentially be a professional negligence claim.
If you are serious about contesting a personal guarantee, we can give you an initial overview of the prospects of success for a fixed fee. Our costs for this will be between £200-£500 + VAT, but we can be more specific once we know what needs to be reviewed. You can then decide whether it is worth contesting.
If you’re on the hook for tens of thousands of pounds, it could be worth getting an initial advice to see if you can reduce that liability.
How much would it cost to defend a Personal Guarantee?
Each case depends on its own facts, but if there are complex issues and the matter went all the way to trial it could cost between £20,000 – £40,000. Don’t forget that the normal rule in litigation, is that the loser pays the winner’s costs, so you would need to add that risk in.
What should I do if I am being pursued as a Guarantor?
Open up communication channels asap. The longer you leave it, the less time you have to negotiate and rely on the goodwill of the lender. Also, get legal advice quickly and look towards preserving your own assets.
Should I get a solicitor to draft or review a Personal Guarantee?
Absolutely. Always seek independent legal advice to ensure that it is properly drafted. Do not be tempted to use a free template and do not just accept that a draft agreement is fit for purpose just because it has been drafted by the other party’s solicitor.
How much does it cost to get a Personal Guarantee drafted?
You can see from above the many pitfalls involved with personal guarantees, so get it done properly. We can undertake this type of work on a fixed fee basis. If drafting a personal guarantee on its own, our charges start from £350 + VAT. In terms of how long it would take to draft this document, this can usually be done within a week.
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