If you’re a business owner or a company director, you may likely be asked to sign a personal guarantee at some point. But what does this mean, and what should you be aware of before putting pen to paper? 

What is a personal guarantee? 

Well, to put it simply, a personal guarantee is a legal commitment made by an individual – usually a director or owner of a company – to repay a debt or fulfil obligations if the company fails to do so. 

In other words, it’s a safety net for landlords, lenders or suppliers as it assures them they will be paid even if the business encounters financial difficulties. 

As with any financial or legal decision, it is always wise to seek independent specialist advice before making any commitments. 

• Personal guarantees tend to be applied to the following: 

• Asset leasing agreements 

• Business loans 

• Invoice finance arrangements 

• Property leases 

• Trade supplies 

Do I have to sign a personal guarantee?  

You have no obligation to anyone to sign a personal guarantee, however, lenders are unlikely to offer a loan to a company if there is not a guarantee in place.  

So, although it is technically optional, if you choose not to sign one, it could result in the financial facilities not being provided.  

Key considerations before signing a personal guarantee  

Signing a personal guarantee means you are personally liable for the company’s debts.  

This can extend to your personal assets, including your home, savings, and other valuable possessions, so, it’s crucial to fully understand the extent of your liability and the potential risks involved. 

Personal guarantees are often negotiable. You can attempt to limit the scope and duration of the guarantee, specify a cap on the amount you are liable for, or include clauses that release you from the guarantee after certain conditions are met.  

You should discuss these options with your solicitor and the other party involved. 

Before committing to a personal guarantee, take a close look at your company’s financial health. Assess the risks involved and consider whether your business has a stable cash flow and a solid growth plan.  

If you’re uncomfortable with the idea of a personal guarantee, explore alternative options. These might include negotiating a higher security deposit, offering a company guarantee, or providing a letter of credit.  

These alternatives can sometimes provide the security required by landlords or lenders without putting your personal assets at risk. 

Are personal guarantees always enforceable? 

In the worst-case scenario, personal guarantees become unenforceable only after the relevant limitation period has passed. 

A limitation period is the maximum amount of time allowed by law to start legal proceedings for a breach of the guarantee contract. However, the contract might have specific time limits that further restrict when the creditor can make a claim. This depends on the contract’s terms. 

The general legal rules are: 

• For standard contracts, it’s 6 years from the breach date. 

• For deeds, it’s 12 years from the breach date. 

It’s unlikely that a creditor will let these periods expire without taking action. 

Additionally, certain events before or after signing the guarantee might make it unenforceable. 

Exit strategy for personal guarantees 

It’s important to have a clear understanding of how you can be released from the personal guarantee.  

This might occur when the lease expires, the debt is paid off, or when certain performance criteria are met. Make sure these terms are clearly outlined in the guarantee document. 

You might resign as a director of a company and remain personally responsible as a guarantor for the company’s debt. 

Resigning alone does not release you from a personal guarantee. This situation can be particularly sensitive, especially if the company is being sold or is not performing well (currently or in the future). 

It’s important to carefully manage the exit from a personal guarantee to avoid triggering an immediate demand from the lender.  

To ensure lenders don’t come calling in the future, contact a commercial property solicitor to discuss your situation and advise you on a safe and proper exit strategy. 

Potential pitfalls to be aware of 

Some guarantees are unlimited, meaning there is no cap on the amount you could be liable for, so, always aim to negotiate a limit to protect yourself from excessive liability. 

If you are signing a guarantee along with other directors or shareholders, check if the guarantee is joint and several. This means that the creditor can pursue any or all of the guarantors for the full amount owed, regardless of individual shareholdings or involvement. 

Understanding the events that could trigger a default and result in the personal guarantee being called upon is important. Making sure these are clearly defined and fair will help mitigate the risks of this happening. 

How we can help 

Signing a personal guarantee is a significant commitment that requires careful consideration and understanding. By seeking independent legal advice, negotiating favourable terms, and fully understanding the implications, you can protect yourself and make an informed decision. 

Always weigh the potential risks and benefits and explore alternatives where possible to mitigate your personal liability. 

Remember, while a personal guarantee can be a useful tool in securing business agreements, it should never be entered into lightly. Protecting your personal assets should be a top priority, ensuring that you and your business can thrive without undue risk. 

If you need independent advice on a guarantee, by you or a company you own we can advise and negotiate for you. 

We are familiar with how all the major banks operate and pride ourselves in dealing quickly and efficiently in all banking matters. 

Get in touch with our commercial property team today for further advice or assistance.