You Can Bank On It – Understanding Personal Guarantees and Independent Legal Advice

23 October 2023

In the world of corporate lending, banks and lenders will always be looking to best protect and secure their lending. In respect of security, there are a number of ways in which this can be achieved and these will vary depending upon the circumstances of the loan or facility.

One of the most common examples of lending, will be in the form of a mortgage for the purchase of a property. In these circumstances, the mortgage will almost certainly be secured against the property which is being purchased. However, this is not always available to a lender, or it may not be the only security the lender is looking for.

In the event of a business receiving a loan or accessing an overdraft facility, there is not always property acquired as part of this process and as such a charge may not be available as security for the lender. In these scenarios, the main two options would be to either put in place a security over the business’ assets, or to require a third party to guarantee the lending.

In terms of a third party guarantee this will usually be applicable for smaller businesses, where there may be less security provided to the lender or bank by a debenture or charge over the business. This will also similarly apply under certain mortgages (such as Buy-To-Lets) where the mortgage is being provided to a limited company, which has been set up for the acquisition of the property. The bank will usually want a personal guarantee from the shareholders of the limited company to protect their asset.

In this instance the third party, who will usually be the director/ shareholder of a business may be expected to guarantee the performance of the company. As part of this guarantee, the business owner will be expected to risk their own personal assets, such as their house, to secure the lending facility.

This is what is known as a Personal Guarantee. This is as the person who owns and runs the business, is guaranteeing the loan will not be defaulted on.

If you have been presented with a personal guarantee, it is also vital that you are aware of the terms of the document and the personal implications of agreeing to guarantee the terms of the loan or facility agreement.

In fact, a majority of lenders will expect that any person who is providing a personal guarantee will be expected to obtain “independent legal advice” or ILA on the contents of the document, to ensure that the individual understands exactly what they are agreeing to.

If you are asking yourself why you are obligated to seek independent legal advice by your bank or lender, this is due to a number of court decisions that have set precedents stating that a director or shareholder who signed a personal guarantee did not understand the implications of the document. Consequently deeming the agreement to be unenforceable. As a result lenders will now require that legal advice is sought beforehand, and that a solicitor is providing a legal certificate to set out that they have advised the client of this. In almost all instances, a lender will now refuse to proceed with the loan without the ILA being completed in regards to the guarantee as the risk of it being unenforceable is too significant.

Where you are required to obtain legal advice on a personal guarantee, or you would like to receive this advice to ensure you understand the implications of agreeing to provide this, we would be able to assist you with this.

We provide a fixed fee quote to provide the legal advice which will entail us reviewing the document and advising you of the contents of this in a meeting. We are flexible to assist with the independent legal advice remotely, where your lender is agreeable to this, as well as in person. In addition to this we are able to assist with this with a quick turnaround time from instruction to completion of the ILA – in some instances this can be the same day.

If you have been presented with a personal guarantee document and you are either obliged to seek independent legal advice, or you would be looking to obtain this to ensure you understand the veracity of a document, please feel free to get in touch by filling out an enquiry form or by telephone on 01273 447 065.

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