A personal guarantee is a promise by an individual to fulfil the financial and other obligations of a party to a contract in case that party defaults. Some examples are where a parent guarantees a home loan taken out by an adult child or where a company enters into a lease of business premises and a director guarantees the company’s performance of all its obligations under that lease.
In the case of a home loan, a bank will sometimes require security over not only the property being purchased but the home of the parent as guarantor as well. This means that if the child defaults under the loan, not only will the bank have rights against the child’s property but the parent’s home could be at risk too.
Similarly, if a company under a lease defaults in paying rent and/or causes other losses to the landlord such as property damage, a director who gave a personal guarantee would be liable to cover all the moneys owed by the company if it has little or no assets.
It is therefore critical for anyone who is required to give a personal guarantee to consider its implications fully and to obtain proper legal advice about all its terms before signing on the dotted line. Some issues to be addressed include:
- Is the guarantee unlimited or limited to a maximum amount?
- Do you really need to give the guarantee?
- Is the guarantee for a set period of time or continuous?
- What is the financial position of the person or company whose debts are being guaranteed?
- Are you under financial or other pressure to enter into an unwise arrangement?
September 2024