Often the words “Guarantee” and “Guarantor” get thrown around without much, or enough thought at all but we must always consider how serious entering into a guarantee can be. So, what do we mean when we talk about guarantees? Well, a guarantee is essentially a contract promising to meet the liabilities of a third party in the event that that party fails to perform its obligations under an initial contract made between that third party and another. The classic example is a landlord and tenant situation – the landlord, Benny leases his property out to Tommy who wishes to run a coffee shop. Benny is nervous about how successful Tommy will be and concerned that he will be unable to make the monthly rental payment of £3,000 and therefore requests that Tommy has a guarantor. Tommy asks Sammy, his best friend to give a guarantee.
So, what should Sammy be considering before he signs away? Well, the first step should be to seek legal advice because by giving a guarantee he will be taking a serious financial risk. If Tommy doesn’t pay his rent or perform any of the other obligations under the lease, Benny can demand that Sammy meets those obligations. However, the underlying contract which is being guaranteed isn’t always necessarily a lease – it could be any sort of contractual agreement requiring one party to do something in return for something else. It is important when acting as a guarantor that you see and understand the final contract that is being guaranteed and that you understand all of the liabilities under that contract.
Entering into business discussions and negotiations can be overwhelming – when the word “guarantee” starts flying about, it is important to consider the following:
- How confident are you that the person (or company) whose obligations under the contract you are guaranteeing is able to perform the obligations under that contract?
- What can you do to ensure that the person (or company) meets their obligations, if anything?
- The term of the guarantee – is there an end date?
- Are you risking destroying your relationship with that person (or company) if they breach the contract that you are guaranteeing?
- Is the person (or company) really in a strong financial position?
- What is the scope of the guarantee – if push came to shove and you were required to (for example pay £30,000) would you be able to?
- Does the risk lie solely with you or are there more than one (or could there be more than one) guarantors in place?
So, the decision to enter into a guarantee should not be taken lightly. Should you have any questions or should you require any independent advice on guarantees and the implications of entering into one, please contact our corporate/commercial team.
Bright (South West) LLP