Matt Fretten, head of Frettens’ corporate & commercial team, answers the most frequently asked questions about personal guarantees.
What is a personal guarantee?
A personal guarantee is a legally binding obligation on an individual to repay a third party’s debt or borrowing. Often encountered in the context of a limited company borrowing funds from or incurring a liability to a third party, which are then guaranteed by an individual director or shareholder.
What is a personal guarantee for a business loan?
If a limited company is borrowing funds from a lender, a personal guarantee is often a requirement of such funding introducing a personal element of risk for the relevant director or shareholder in respect of such borrowing.
The addition of a personal guarantee provides greater security for a lender than simply relying on the contractual obligations binding the limited company borrowing the funds.
What is a personal guarantee on a lease?
A personal guarantee may be a requirement placed on a limited company tenant entering into a lease of premises. The obligations under the lease may be guaranteed by an individual director or shareholder to provide the landlord with greater security.
How does a personal guarantee work?
A personal guarantee will normally be in writing and may either be a separate document or incorporated into a document between the relevant borrower/tenant and the lender/landlord.
What is joint and several liability?
If there is more than one guarantor, their liability is normally ‘joint and several’ meaning that the guarantors have ‘jointly’ made the same promise to the person requesting the guarantee but also individually made the same promise to the relevant person.
The net effect of this is that the person entitled to enforce the guarantee may pursue one or all of the guarantors to satisfy any sums due, putting any of the guarantors at risk of having to settle the full amount due under the guarantee.
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