UK: SME/Professional Counsel - Don't make promises lightly.

UK: SME/Professional Counsel - Don't make promises lightly. - What are the implications of signing a personal guarantee?

Last Updated: 31 Aug 2010

What are the implications of signing a personal guarantee?

So what exactly is a personal guarantee? Basically, it is a contract, or legally binding promise, to discharge someone else's liability. If they don't pay, you could be sued and made to pay instead.

In extreme cases, you might even lose your house.

A personal guarantee is most commonly given to your bank to secure your business' overdraft, to landlords of business premises to secure the rent or to large suppliers for amounts owing for goods. Giving one reverses the benefits of trading as a company with limited liability.

A bank guarantee will be in the bank's standard form but with landlords and suppliers it may be in a formal document that you sign, such as a lease, or even in letters that you have written, promising to pay sums owing. Be careful about providing any sort of personal commitment, however informal.

Is the guarantee secured over your personal property, such as a mortgage over your house? This could affect your husband's or wife's interest in the property if the guarantee is called in. In particular, be careful if you already have a mortgage with the bank that asks you for the guarantee, as your mortgage contract may say it secures all monies owing to the bank and not just the amount of your mortgage payments.

The guarantee should make clear the amounts to which it relates.

There should be a limit on the amount of your liability.

You should always be aware whether or not the guarantee has been secured over your personal assets.

The guarantee should make clear how it can be terminated.

You should have the right to terminate the guarantee by, say, a month's written notice. But you cannot avoid all liability by serving notice to terminate. The amount for which you are liable is simply frozen as at the date when the termination notice becomes effective.

Maurice Dwyer is a corporate law specialist at Wragge & Co 0121 233 1000.

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