To Guarantee or Not Guarantee? That is the Question…

Jun 13, 2016
What is a Guarantee? 
Quite simply, a guarantee is a document that makes a particular individual accountable for another party’s obligations under an agreement. For example, you can give a guarantee to a landlord to ensure your son or daughter keeps up the rent payments, or a guarantee to your bank for your company’s banking facilities. 

What Does a Guarantee Mean for You? 
By signing up to a guarantee you are effectively stepping into the shoes of another party if that party fails to pay the money due under the original agreement. You must therefore be prepared and financially able to fulfil those obligations as the person who obtains the guarantee from you is likely to seek to enforce it against you. For example, if a company went bust and you gave a guarantee, then you are liable to pay the sums. 

You need to be careful that you understand what exactly you are being asked to guarantee? Are you promising to pay additional costs, interest as well as the amount due under the original agreement? Or even perform particular tasks? Carry out your own risk assessment to your own situation and be careful not to load yourself up with more guarantees than you are capable of supporting if a worst case scenario hits. 

What Should I Look Out For? 
Consider if you are going to have a cap on the total amount of liability that you are being asked to guarantee; for example, up to the limit of the third party banking limits. If there is no limit, then this of course increases your exposure to risk. Finding out, in monetary terms, what you are committing to is very important. Each lender has different terms, so it varies depending on who you are entering into a guarantee with. Therefore it is always important to get independent legal advice if you are not sure how this works in practice. 

Is a Guarantee Right For Me?
Only you can decide this. You need to self-assess your own situation and weigh up if you can afford to put your assets, including your residential home, at risk if the third party were to default in any way. The value of the amount you are choosing to guarantee could also affect this decision. Similarly, if you can fund the money that is being borrowed, if it is a loan, you may wish to consider that as an alternative. 

Should I Get Independent Legal Advice? 
Where banks are involved, it is quite common for them to suggest or insist on your getting independent legal advice. You therefore may find yourself in a position where you have no choice but to do this. This is to ensure that you have had explained to you the exact nature and commitments of the documents you are signing so you are full aware of the obligations on you. Banks may seek to rely on this in the future if there was ever to be a dispute. 

Nicola Lucas

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Nicola Lucas

Nicola is a member of our Business Law Team handling all the commercial requirements of her clients such as shareholder agreements and negotiating on commercial ...

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