We are often approached by “Buy to let” investors in Wimbledon and London who are purchasing property through a company where the lender has asked them to sign a personal guarantee/indemnity. Such a guarantee is usually required by the lender in addition to any other security the lender may insist upon. A guarantee like this is a legal promise to repay a loan made to a company where the person may serve as a director.
Guarantees should not be taken lightly because if the business cannot repay the loan then the lender will come after the person for the debt as he or she will be personally responsible for it.
Many lenders will insist upon such a guarantee before agreeing to a loan, so many people will feel they have no choice but to consent if they feel the loan is essential to their business. But before signing on the dotted line individuals should think carefully, as if things go wrong the lender can pursue people personally, leaving the person under financial pressure and even being made bankrupt or losing a home. Most lenders make it a term of a personal guarantee that the director or person controlling the company takes independent legal advice. Courtyard Solicitors can assist with this and provided there are no obvious unusual elements this service is offered on a “fixed fee” basis.
It’s important to understand the difference between a “guarantee” and an “indemnity”: the former is a secondary obligation contingent on the principal (usually the company) failing to perform the obligations which have been guaranteed - such obligations will usually be payments to the lender. In such a case if it can be shown at a later stage that the obligations should not apply for some reason - such as a breach of a contractual term making the loan contract void or unenforceable - then the director may escape personal liability under the guarantee. An “indemnity” goes further as it is an obligation of a primary nature, meaning the person indemnifying the lender in relation to a loss under a contract will remain liable even if the underlying contract is void or unenforceable.
Most guarantee documentation contains both a guarantee and an indemnity.
If a director disposes of a business by sale or otherwise it is essential to ensure the personal obligations are discharged, otherwise the selling person will remain liable despite disposing of the company.
Given the potential serious consequences of giving a guarantee/indemnity it may be worth individuals seeking alternative funding options on the market where the lender does not insist on a personal guarantee. Specialist brokers and others may be able to assist with this.
If a business goes bust then the lender with a guarantee in place will seek to enforce against the person personally. So another avenue worth exploring is taking out an insurance policy against a lender seeking to enforce the guarantee. Individuals should take expert advice from brokers or insurance companies about whether such personal guarantee insurance may be available at an acceptable premium.
Courtyard Solicitors offer a fixed fee of £290+VAT for this service.
For both Occupier Consent Forms, Land Registry ID Verification forms and Personal Guarantees the fee includes; answering your initial query and taking instructions, dealing with "know your client" regulations and ID checks, opening the file on our system, meeting you in person where required, advising as necessary, completing the required forms, then dealing with any follow up queries from third parties and file retention for at least six years.