Personal guarantees – pitfalls and penalties

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.