Deed of Guarantee: 6 Key Points
What is it?
A deed of guarantee is a legal document in which one person or company guarantees that it will fulfil the obligations of another person or company if it is unable to do so. It is typically used in the context of guaranteeing the repayment of a debt, where the loan agreement itself doesn’t include provision for a guarantee.
Application for small business people
Small business people will often have to take out loans in order to start up or expand their business. In many cases, the loan agreement itself will require some form of security, either in the form of a mortgage or a charge over property. Where this is not set out in the loan agreement, the lender may require a separate deed of guarantee to provide certainty that the debt will be repaid.
It is vital that the guarantor clearly understands the borrower’s obligations under the original loan agreement. The guarantor should also know what will constitute a breach of the loan agreement, and when the guarantor will be required to act.
Owners of small businesses may decide to be guarantors for money lent to the company. In these situations, the lender will generally have recourse to the business owner’s personal assets if the company is unable to repay the debt.
Alternatively, a small business may be the guarantor of a loan for an owner or associate. This is usually only an option if the company holds sufficient assets to repay the debt should the borrower default under the loan agreement. Lenders will often ask for a statement of assets and liabilities from the company before accepting it as a guarantor.
6 key things to consider
Whether you are entering into a deed of guarantee as the guarantor or the lender, there are many important considerations to be made. Some of these include:
- What exactly are the conditions of the loan that is being guaranteed?
- Who is the guarantor? Is it a company or an individual?
- Does the guarantor have sufficient assets to repay the loan should that become necessary?
- Has the guarantor obtained independent legal advice regarding the terms of the loan and the deed of guarantee?
- How is the deed to be executed? If the guarantor is a company, who is permitted to sign on behalf of the company?
- What are the payment terms and conditions?
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Joe Kafrouni, Accredited Specialist in Business Law, Kafrouni Law
Disclaimer: This article is general information only and is not legal advice. Before acting on it, get advice on your own circumstances. To the extent the law allows, Kafrouni Law accepts no liability for any loss arising from reliance on it. This article is the copyright of Kafrouni Law.
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