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A guarantee is a secondary obligation to pay the debt or perform a duty in the event of the failure of another person or entity who is primarily liable. Guarantees are used as security if a lender thinks a borrower may not be able to repay a loan or fulfil their obligations under a contract. Landlords of commercial and retail premises may require some form of security from a tenant to protect themselves if a tenant defaults under the lease. For example, this security offers protection if a tenant breaches the lease or does not pay owing rent. There are generally two types of guarantees that can be provided under a lease. These are either a bank guarantee, a personal guarantee or both.
It is important to always seek legal advice before entering into a guarantee or providing one to your landlord. This article will explain:
- what a bank guarantee is;
- what a personal guarantee is; and
- whether you should provide a personal guarantee or a bank guarantee.
What Is a Bank Guarantee?
A bank guarantee is an undertaking from a bank or credit union for the purpose of guaranteeing payment of the amount owed to the landlord. The lease will then provide the landlord with the right to draw down on the bank guarantee if you breach the lease terms or damage the property. They can do this without your notice or consent. Additionally, your landlord can repair the property or bring rental arrears up to date by drawing down on the bank guarantee.
What Is a Personal Guarantee?
A personal guarantee is a personal responsibility taken on by an individual to guarantee the obligations of another individual or entity under the lease. For example, if a tenant enters into the lease as a limited liability (Pty Ltd) company, a landlord will commonly request a personal guarantee from all the directors. Landlords may often require a tenant to provide this guarantee in addition to a bank guarantee or security deposit.
Suppose your company has entered into a lease, and the company director provides a personal guarantee in the lease. In that case, the director then becomes a guarantor. If the company in the lease defaults on the lease, then the director, will be personally liable. As they have provided a personal guarantor, they must pay back any debts or defaulted amounts to the landlord under the lease.
Risks of Making a Personal Guarantee
Remember that as a guarantor, you will be legally responsible for paying back any outstanding amounts under the lease. This will place risk on any personal assets you may own, which could include your family home. This can be a considerable risk, and it is crucial to seek legal advice before signing a personal guarantee.
Additionally, there may be other options that you can arrange with your landlord before resorting to a personal guarantee. As a tenant, you may consider alternative options to giving a personal guarantee. Some options you could take include:
- negotiations with the landlord;
- offering to increase the bank guarantee instead of providing a personal guarantee; and
- requesting a cap on the amount of the personal guarantee to a number you are comfortable with. For example, limiting it to $20,000.
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Should I Provide a Personal Guarantee?
Generally, it is not advisable to provide a personal guarantee. Although this is the best option, the reality is that in some cases, a landlord may insist upon it, even after trying to negotiate another option. If this is the case, it is important to seek legal and financial advice prior to giving the guarantee. This ensures that you understand what you are agreeing to and if called upon, how the personal guarantee will impact your personal assets. Commonly, you guarantee the principal amount as well as additional sums, including interest and fees.
Bank Guarantee vs Personal Guarantees
In most cases, providing a bank guarantee over a personal guarantee is advised. However, a personal guarantee does not require the tenant or company directors to provide any payment upfront. If the tenant never breaches the lease, the landlord may never draw on the guarantee. As a tenant, you may be in a situation where your cash flow is tight, and you do not have the means to increase your bank guarantee. In these circumstances, providing a personal guarantee may be a better option. If this is the case it is crucial to understand the terms of the arrangement and what this means for your personal assets. It will also be important to request a cap on the guarantee that you are comfortable with.
Bank Guarantee Requirements
When providing a bank guarantee, it is important to ensure it meets the requirements and it is ready to be provided to the landlord.
A bank guarantee details:
- the name of the favouree. Which in these circumstances is the landlord;
- the Australian Company Number or Australian Business Number of the favouree (if applicable);
- the reason for the guarantee;
- a description of the premises;
- the amount of the guarantee, including GST payable on that amount; and
- the expiry date of the guarantee. A landlord will commonly require no expiry date or that it is at least three to six months after the expiry date of the lease.
When you agree to provide a personal guarantee, you are taking on a personal risk. It is important to consider the consequences that this could cause on your personal life. If your landlord insists on a personal guarantee from the directors of your company, you should obtain both legal and financial advice so you understand your rights and obligations under that guarantee. A property lawyer will be able to ensure the guarantee you are providing is reasonable, minimise your risk as much as possible and provide you with alternative options that could be negotiated with your landlord. For assistance, contact LegalVision’s property lawyers on 1300 544 755 or fill out the form on this page.
Frequently Asked Questions
It is a personal responsibility taken on by an individual to guarantee the obligations of another individual or entity under the lease.
It is an undertaking from a bank or credit union for the purpose of guaranteeing payment of the amount owed to the landlord.
Firstly, you should try to negotiate another option. If they still insist then it is important to seek legal and financial advice prior to giving the guarantee to ensure that you understand the agreement and how the guarantee will impact your personal assets, if called upon.
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