Personal guarantees are most commonly requested by banks to secure overdrafts, particularly from company directors for a business overdraft.
However, they are also commonly used by landlords for rental property, both commercial and residential, and may be requested by a supplier of goods or services as part of the contract.
Whilst some high value personal guarantees to a bank may be secured against the guarantor’s property, this is far less common for guarantees to landlords and suppliers.
Personal guarantees for property
This situation would arise when the landlord is concerned about the risk of rent arrears and wants to ensure that a person, the guarantor, can be obliged to pay any arrears the tenant incurs.
In the case of a business renting commercial premises, the landlord is likely to ask for a personal guarantee from one or all of the directors of the business.
In the case of residential accommodation, it might be that the landlord insists on a guarantor for someone with little or no credit rating, for example a student or someone moving from overseas.
With a limited company, the limited liability means that the directors have no personal liability for the debts of the business. However, when they sign a personal guarantee, this is permission for the creditor to pursue their personal assets to obtain payment.
It is becoming more commonplace for companies to ask for personal guarantees from company directors when supplying goods or services. They may include this as part of the contract (the contract should request that the director sign their agreement to that part specifically for it to be valid) or as a separate agreement.
As the supplier, you may choose to give your customer the option between a deposit and a personal guarantee. If asking for a guarantee, I strongly recommend taking legal advice to ensure the guarantee can be enforced if required.
Enforcing a guarantee
Should you need to enforce the guarantee, you will need to sue both the debtor and the guarantor. For a landlord this would be the actual tenants and the guarantor; for a company, you would sue the company itself and the guarantors, normally the directors.
Having sued both entities, you will receive your judgment, which you can then transfer to the High Court for enforcement via a writ of control.
Alternatively you can obtain a charging order against the guarantor’s property. This does not prevent you from then proceeding with the enforcement of the writ of control
Once you have instructed a High Court Enforcement Officer (HCEO), he will attend the debtor’s premises to attempt to recover the debt.
It is normal practice for the HCEO to first attempt recovery from the debtor, before turning to the guarantor. If they do need to enforce against the guarantor, then their personal possessions are available for seizure to satisfy the writ.