What is a deed of guarantee

When lending money to a company, especially a new one, the bank providing the business loan may require a personal guarantee from the company's directors.

The reason for this is simple, the bank wants to reduce the risk of the loan not being repaid by making the company directors, or shareholders personally liable to repay the guaranteed obligations on demand.

The purpose of personal guarantees

A personal guarantee, also referred to as a "PG," serves as a form of security for the lender. It ensures that if the other company defaults or fails to meet its loan obligations, the bank can recover the debt from the personal assets of the guarantors.

This reduces the bank's risk and improves the likelihood of loan approval for the borrowing company. In addition to personal guarantees, the bank might also request an indemnity, further strengthening the guarantor's obligations.

The indemnity serves as a promise to compensate the bank for any loss resulting from the company's default, and its obligations are substantial. As the party/ies guaranteeing the loan is a separate legal entity from the company, the bank requires them to obtain individual legal guidance on the nature and effect of the guarantee deed.

Independent legal advice

As the entities guaranteeing the loan are separate from the company, the bank requires them to seek independent legal advice on the nature and effect of the guarantee deed.

This ensures that guarantors and limited companies fully understand the legal and financial implications of the guarantee they are providing.

Under certain circumstances, if independent advice is not obtained, this can result in an unenforceable personal guarantee. If there was undue influence or misrepresentation, or if the terms of the guarantee are deemed unfair, this can also make a personal guarantee unenforceable.

We have a Legal Advisor who is able to support you with independent legal advice for your guarantee deed and we offer:

• Face to Face or video calls to suit your circumstances.
• Out-of-work-hour meetings.
• Competitive Fixed fee - agreed upfront with no hidden extras.
• Fast turnaround.

Our Legal Advisor will explain fully the implications of entering into a finance agreement, the guarantee deed and the risks you need to be aware of before signing it. Call us now to discuss this further at 0333 344 3234 (local call charges apply).

Negotiating the terms of a guarantee

Can you negotiate the terms in a guarantee?

In theory, yes, however, the borrower's timeframes may not allow the time necessary to negotiate the deed.

The guarantee deed is often completed towards the end of the loan process, so the drive to finalise the formalities can be more important to the company, above removing or varying some of the standard clauses.

However, it is essential to be aware that some lenders require the guarantee deed to be received without amendments, and as such, none of the terms can be amended.

What does the legal advisor need?

To provide legal advice, the legal advisor needs several documents and details:

• Mortgage offer;
• Terms & Conditions of the lender;
• Guarantee deed
• An explanation of the purpose for which the facility/new facility is required;
• A note of the current amount of indebtedness of the principal debtor;
• A note of the amount of the principal debtor's current overdraft facility; and
• A copy of any written application by the principal debtor for a facility.

Mortgage Guarantee Deeds

What is the Guarantor guaranteeing?

The guarantor is responsible for ensuring all current and future payment obligations and liabilities of the borrower to the bank, including interest and expenses, are guaranteed by a secured loan. This applies to both the initial loan and any additional borrowing.

Can you stop being a Guarantor?

There is a termination clause within the guarantee deed; however, in most deeds, the termination of the guarantor does not necessarily mean they have terminated their obligations under the deed.

The guarantor can terminate the guarantee at any time. However, the guarantor's liability under the guarantee deed will continue in full force and effect for all guaranteed obligations as of the date of expiry of the notice.

Can the bank offset a liability?

Yes, in some mortgage guarantee deeds, the bank has the right to offset the guarantor's liability against any liability the bank has with the guarantor.

An example of the type of liability the bank has with the guarantor would be savings held in the bank. This can happen at any time, whether the borrower has defaulted on their obligations or not.

What happens if the borrower needs more money?

The borrower can request further borrowing from the bank without the consent of the guarantor. Even though there is no consent required from the guarantor, they will still be liable for the additional borrowing under the terms of the Guarantee Deed.

Does the personal guarantee deed replace the mortgage offer?

No, the Deed of Guarantee and Indemnity within it is supplemental to the Mortgage between the Borrower and the Company relating to the Property, which incorporates the Conditions and the Mortgage Offer.

What happens if the borrower stops paying the mortgage repayments?

If the borrower stops repaying the mortgage repayments, the bank can call upon the guarantor to repay the loan amount including any costs in full.

If the guarantor is unable to repay the full loan amount then the bank could seek settlement from their assets and if this doesn't settle the amount in full, then the bank could start bankruptcy proceedings.

Additionally, the guarantor would be legally prohibited from forming, promoting or managing the limited company unless they have written consent from the court.

Impact on personal credit

A personal guarantee can significantly impact the guarantor's credit rating if the borrower defaults and the bank calls upon the guarantor. This can lead to adverse credit events such as missed payments, defaults, or even bankruptcy, which can stay on a credit report for several years.

Guarantors should be aware that their creditworthiness is directly linked to the borrower's ability to repay the loan. These negative marks can impact the guarantor's ability to secure future credit, such as mortgages, car loans, and credit cards.

The presence of a personal guarantee can impact the guarantor's credit even before a default occurs. Credit agencies may view the potential liability as an existing debt, affecting the guarantor's debt-to-income ratio and potentially leading to limited access to additional credit and higher interest rates on new loans.

Unsecured loans and personal guarantees

Unsecured loans are a type of financing that does not require collateral. These loans are typically harder to obtain, especially for new or small businesses, because they pose a higher risk to the lender.

Lenders often require a personal guarantee from the business owner or directors to mitigate risk. Unsecured loans, while attractive for not requiring business assets as collateral, effectively become a form of secured debt due to the personal guarantee.

The guarantor's assets serve as the backup for loan repayment. Business owners should be especially careful with an unsecured loan or loans that require personal guarantees, ensuring they fully comprehend the terms and their liability.

Personal guarantee insurance options

Some guarantors may consider taking out insurance to cover their obligations under a personal guarantee. This type of insurance, often referred to as Personal Guarantee Insurance (PGI), can provide peace of mind and a financial safety net in case the borrower defaults.

PGI typically covers a percentage of the guaranteed amount, reducing the guarantor’s financial exposure. However, these insurance policies can be costly and may have specific exclusions and limitations. It is important for guarantors to carefully review the terms and conditions of the policy to understand what is covered and what is not.

For instance, some policies may only cover a portion of the guarantee, or they may exclude certain types of defaults. The underwriting process for PGI can be rigorous, requiring detailed financial information about both the guarantor and the borrower.

Given the complexities and potential risks involved, it is crucial to seek legal advice from both legal and financial advisors before entering into a personal guarantee. They can help assess the risks, negotiate terms (where possible), and provide guidance on protecting personal assets.

Small business owners

For small business owners, providing a personal guarantee can be a double-edged sword. On one hand, it may be necessary to secure financing for business operations, expansion, or cash flow management.

On the other hand, it puts the owner's assets at risk. Small firm owners should weigh the benefits of obtaining the loan against the potential personal liability and financial consequences.

Small company owners should explore all available financing options before committing to a personal guarantee. This includes seeking alternative funding sources such as grants, investors, or venture capital.

Additionally, maintaining a strong business credit profile can help secure business loans with more favourable terms and potentially avoid the need for a personal guarantee.