Deed of Guarantee - what buy-to-let investors need to know?

What are you agreeing to?

A limited company is a separate legal entity from its directors and shareholders. Its borrowing is ordinarily its own responsibility. A personal guarantee gives the lender an additional route to recover money if the company fails to meet its obligations.

By signing, you take on a personal commitment to the lender. Depending on the wording, your liability may extend beyond the mortgage amount to include interest, charges and enforcement costs. In some cases, there may be no financial cap on your liability. Your personal assets could be at risk if you are called upon to pay.

Understanding your personal exposure

Before signing, establish whether your liability is capped, what any cap covers and whether the guarantee relates only to this mortgage or extends to other borrowing. Ask when the lender can demand payment and what must happen before you can be released from the guarantee. If more than one person is guaranteeing the borrowing, check whether liability is joint and several. This can allow the lender to pursue one guarantor for the full amount covered by the guarantee, rather than simply that person’s share. 

Some deeds also include an indemnity, which creates a separate obligation to compensate the lender for specified losses. Ask your solicitor to explain how this affects the circumstances in which the lender can require you to pay.

Do not assume that selling your shares or resigning as a director brings your guarantee to an end. Check the release provisions and obtain confirmation from the lender before treating your personal commitment as finished.

Seeking expert advice

Many lenders require guarantors to obtain independent legal advice from a solicitor who is separate from, and independent of, the team handling the company’s purchase or refinance. The appointment gives you an opportunity to understand the document, discuss the financial consequences and ask questions before committing yourself. It is more than a signature-witnessing exercise.

The solicitor should explain the nature and effect of the guarantee, the extent of your potential liability and the risks relevant to your circumstances. Receiving advice does not remove those risks; it helps you decide whether you are prepared to accept them.

The House of Lords decision in Royal Bank of Scotland plc v Etridge (No 2) [2001] UKHL 44 addressed undue influence and the steps lenders can take to protect their position. It underlines the importance of properly explaining the transaction to the person and therefore giving them security.

Allowing time for advice

Arranging independent legal advice late in a transaction can delay completion. Depending on the lender’s requirements, directors may need to instruct another firm to receive advice and sign the deed.

Directors must find a suitable solicitor, provide identification and documents, arrange an appointment and return correctly completed and signed paperwork to the company’s conveyancer. Limited appointment availability and documents passing between firms can be one of the main causes of delays in completion.

Independent advice does not always require a different law firm. Whether another solicitor within the same firm can advise depends on the lender’s requirements and the firm’s assessment of conflicts of interest and independence.

At Blacks, where those requirements are satisfied, the in-house service can coordinate the advice alongside the purchase or refinance. This can reduce the administration involved in instructing another firm and make it easier to arrange appointments and return documents, while keeping the guarantor’s advice focused on their individual position.

Looking ahead

Confirming lender requirements early, understanding exposure and allowing time for advice can help you make an informed choice and keep your purchase or refinance on track.

For more information, please visit: www.lawblacks.com