Personal guarantees can be a useful tool when negotiating amendments to an existing agreement or to offer an extra layer of reassurance to a beneficiary. However, they are often underestimated and signed without realising the consequences.
What is a personal guarantee?
A personal guarantee refers to an individual promise to fulfil the obligations of another party if they fail to do so. They are often used as a form of security for debts; for example, a company director gives a personal guarantee to take responsibility if the company fails to repay a debt.
Another common situation for a personal guarantee is in respect of a commercial landlord and tenant scenario where the tenant falls behind with rent arrears and wants to vary the payment terms of their lease by providing a personal guarantee.
Checklist to consider before signing a personal guarantee
Often, personal guarantees are made as gestures of goodwill to build confidence between parties in a contract or dispute situation. Several common pitfalls should be avoided to help minimise disputes, including:
- Signing a personal guarantee and indemnity without taking independent legal advice
- Not reading the full terms of the personal guarantee before signing
- Not understanding the scope of the personal guarantee and indemnity, for example not realising that the personal guarantee is unlimited
- Signing a personal guarantee under duress and without questioning the terms
- Not realising the exposure to your personal assets caused by the personal guarantee.
What if I have already signed a personal guarantee?
Once a personal guarantee has been entered into and one party seeks to enforce the guarantee, there are several ways to challenge a guarantee, including:
- Reviewing the personal guarantee to consider its validity
- Evaluating the terms of the personal guarantee to determine if they are specific enough to be enforceable
- Considering whether the terms of the personal guarantee have been varied, and whether any variation discharges the guarantee
- Investigating whether the guarantee was signed under duress
Entering a personal guarantee in any capacity can be stressful, especially as the continuation of a business or agreement often depends on it. Individuals offering such gestures need to understand the scope of the personal guarantee and the circumstances in which they can be enforced.