Periodically in the course of life, you might be asked to give a personal guarantee. You might be the owner of a business which wants to borrow money and as well as your company giving a charge over property (mortgage) or over its other assets (debenture) to the bank or finance company, they might want you to guarantee the company’s payment obligations. Or here’s an alternative scenario: your ‘child’ has just started university and already there’s the scramble of working out with whom they’ll share a house with in year 2, finding somewhere and before you know it, you’re being asked to sign a bit of paper in which you’re guaranteeing payment of the rent.
In scenario 1, it may be a formal requirement of the lender that you get independent legal advice (ILA) upon the terms of the guarantee. For you, that may feel an unnecessary and costly irritant: you don’t want to give the guarantee and don’t want to pay for ILA. Scenario 2 is more your choice and your rationale may be ‘well I’m effectively paying my son/daughter’s rent anyway’, but how confident are you about what you are being asked to guarantee?
In theory, there is a choice as to whether or not you guarantee and the starting point of ILA is often ‘don’t give a guarantee unless you absolutely have to’. The retort to that in scenario 1 may be ‘well my business won’t get the money unless I guarantee it’, in which case is there an alternative provider who will offer you the facility without a guarantee? In scenario 2, it might be that your child will lose the opportunity to live in this particular house with their embryonic friends.
Understanding the terms and extent of a guarantee whether that’s a requirement or merely prudent is important upfront so that if/when payment is demanded or the person to whom the is given otherwise exercises a right under it, you are not taken by surprise. Invariably the guarantee is also an indemnity – you need to appreciate the difference, not least because any cap on the amount recoverable under the guarantee will not apply to what you may be asked to reimburse under the indemnity.
In scenario 1, such guarantees are drafted hopelessly one-sided in favour of the lender and there are a whole host of mechanisms and devices which are built in to maximise their ability to play around with and preserve the accounts of the customer so as not to affect your ongoing liability as guarantor.
In scenario 2, they may be shorter, scrappier documents and ultimately not even capable of properly binding you so could actually be an easier ‘give’ than you might think.
You may find that lender-type guarantees are not usually capable of amendment, but that is not always the case – we have successfully argued for a cap on liability where one has not been included, and the ability to give notice. Other guarantees such as for student rent liability may be more malleable – why should you be guaranteeing total rent liability in respect of the property rather than just that of your child (a point we have made and got the document amended as a result)?
A third angle on advice on guarantees, is that you may wish to require one yourself of someone else. What can you realistically demand in such case and how can you ensure it is introduced in a manner best able to end up as an enforceable obligation, especially if it is not to be the subject of a standalone document?
In summary, whilst there are instances where it’s an absolute requirement that you get ILA on guarantees, there are others where you probably can’t afford not to either – forewarned is forearmed in knowing the extent of what you are in for.
Carter Lemon Camerons LLP have a number of lawyers used to providing ILA on guarantees and know the requirements and formalities of lenders in reporting thereafter that the advice has been given. We can also draft appropriate forms of guarantee and indemnity for you to carry forward as standalone documents or as provisions in your documents with others.
Written by: Andrew Firman, Parter at Carter Lemon Camerons LLP. Member of PRAGMA.
