How to negotiate a Guarantee Agreement

"Never sign a guarantee agreement" is the mantra of most lawyers. However, in most situations that is simply not practical. Banks and larger lending institutions can be pretty reluctant to waive the requirement for a guarantee entirely. For some lenders, however, it may be possible to negotiate individual terms which reduce your liability. If that's possible, here is a list of some of the things which you should focus on.

Limit your liability

If your intent is to limit your exposure under the guarantee agreement to a fixed amount then you must make sure the agreement is drafted to give you that limitation. You don't want to find out later that you have guaranteed a sum far greater than you first thought. Some guarantees will be "all monies owing" guarantees which should be avoided if at all possible. These are common with revolving credit facilities or where the amount of the loan fluctuates over time. If you can place a financial limit on your guarantee then that places an upper limit on your exposure. 

Guarantee or indemnity?

Check whether you are giving a guarantee or a guarantee and an indemnity. An indemnity not only will require you to guarantee the money that is lent to the borrower, but will also impose an obligation upon you to indemnify the lender for any other loss or harm. With a guarantee agreement you are only guaranteeing what is authorised under the main loan agreement so if the lender breaches the terms of the loan agreement by lending more, the guarantee may not extend to that excess amount loaned. An indemnity agreement however may extend your exposure to unauthorised transactions under the loan account and will also extend your liability to any collection costs which the lender incurs trying to recover any money owed from the borrower. It is important to understand this difference when you are guaranteeing something for a third party.

Is the guarantee joint and several?

If you and your co-director/shareholders are being required to guarantee a loan to your company, then check whether the guarantee is several or joint and several. A several guarantee is where each director guarantees a proportion of the debt. A joint and several guarantee is where each director guarantees the whole debt, meaning the lender can come after all, or just one, of the directors (and usually the one with the most money). A several guarantee is better but may not be acceptable to the lender. If it has to be a joint and several guarantee, then make sure that there is an agreement between you and your co-director/shareholders to indemnify each other so that whoever the lender pursues, each Director/Shareholder's liability is ultimately only up to their proportion of their shareholding in the company.

Place an end date on your liability

If you can limit your guarantee by providing that claims may only be made against you before a certain time then that gives you the certainty of knowing when you will be in the clear. Another option would be to give yourself the right to terminate the agreement by giving a period of notice to the lender, although you may struggle to get this accepted by the lender.

Allowances made to the borrower

Make sure that the lender is not permitted to give the borrower any allowances which enable the lender to come after you for the balance. The borrower should remain fully liable for the principal debt at all times.

Your approval to variations

Where you are not in complete control of the entity which is the borrower, make sure that the lender is not permitted to make variations to the main loan agreement without your approval. Otherwise you could find yourself guaranteeing more than you first thought.

Your ability to negotiate

If you are going to negotiate with a lender then it is important to bear in mind the strength of your negotiating power. If you are a long established customer of the lender with a good trading history then your ability to negotiate will be much better than someone who is a new company and a new customer to the lender. Ultimately, it is all about persuading the lender that you present a low risk to them. The lower the risk, the better your ability to negotiate. Your ability to negotiate individual clauses will always be much higher than your ability to negotiate dispensing with a guarantee agreement altogether and you may want to engage the services of a professional, whether it be a lawyer or someone else, to help you limit your liability. If you can't negotiate, then at least know what you are signing so there are no surprises later on.



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