In our last article, we explained what a personal guarantee is, why they are used and where you’ll commonly find them. In this article, we’ll explore how to recognise one, and explore the common legal implications of personal guarantees.
How can you recognise a personal guarantee?
Most obviously, a legal document may have a separate section or page clearly marked “personal guarantee” in which the terms of the guarantee are set out. Similarly, use of the words “promise”, “guarantee” or “personal capacity” may indicate that a guarantee is being provided.
Sometimes, however, it is less clear that a personal guarantee is being provided. In some contracts, the terms of the guarantee may be contained amongst the other terms of the contract. This is the case with the “law society commercial lease” – a standard form commercial lease which is the most commonly used in New South Wales.
You should always read the terms of any legal document you are considering signing carefully to ensure you fully understand it.
Further, you should not expect that just because you are only signing a document in one place that you are only signing it in one capacity; personal guarantees are often provided by the director of a company signing a contract in only one spot.
What are the legal implications of a personal guarantee?
In its simplest form, a personal guarantee is a promise given from one party (“the third party”) to another party (“the first party”) that it will guarantee the performance of some (or all) of the contractual obligations owed by another party (“the second party”) to the first party.
The guarantee may be provided in respect of all the second party’s obligations under the contract, or only some of them. Similarly, the liability of the third party – known as the “guarantor” may be limited to a certain amount, or unlimited in amount.
The practical effect of a personal guarantee is that if the second party defaults on its obligations under the agreement, the first party can pursue the third party who gave the guarantee – known as the “guarantor” – to the extent of the guarantor’s liability under the guarantee.
Many guarantees also contain “charging” clauses, by which the guarantor “charges” their interest in property they own to the first party. By doing so, the guarantor gives an interest in the land owned by them to the first party, as security for the performance by the second party of its obligations under the agreement.
In the next article: when will a personal guarantee be invalid?