The commercial effect
A company is a separate legal person, but a lender, landlord or supplier may require directors or others to guarantee its obligations. If the company does not pay, the creditor may pursue the guarantor personally according to the document.
The exposure may extend beyond the initial loan amount. Interest, enforcement costs, indemnities and later variations can materially increase the amount claimed.
Guarantee and indemnity
Documents commonly combine a guarantee with an indemnity. The distinction can matter because an indemnity may create a primary obligation that is not affected in the same way as a guarantee by changes to the underlying transaction. The wording, not the document’s title, determines the effect.
Security over property
A guarantee may be supported by a mortgage, charge or other security. That can place the guarantor’s home or investment property at risk. Some documents also permit the creditor to lodge a caveat or require further security in defined circumstances.
Issues to identify before signing
Independent legal advice should address the actual documents and circumstances.
- Is liability capped or unlimited?
- Does it cover future facilities and variations?
- Can the lender proceed directly against the guarantor?
- What property secures the obligation?
- How and when can the guarantee be released?
- Are there multiple guarantors and contribution risks?
Commercial options
Depending on bargaining position, a proposed guarantor may seek a monetary cap, time limit, release trigger, limited security, notice rights or restrictions on later variations. The lender need not agree, but the point for negotiation is before execution.