What can go Wrong?
A landlord owned prime commercial premises that were leased to company B, the branch of a national retail chain, and payment of the rent was guaranteed by company C.
B transferred the lease to another company; both went bust. C didn’t have to pay the lost rent because the Guarantee only covered a lease to B, no one else! (10 years income down the drain).
Guarantee & Indemnity
A Guarantee & Indemnity is a form of contract in which A has a contract with B and C commits to cover A’s loss if B lets A down. It is of course vitally important to ensure that the form of the Guarantee & Indemnity doesn’t also result in A being let down by C as well!
Here are 7 simple ways of minimising argument:
- Draw the Guarantee as a Deed: it extends your time to proceed on a breach. It also avoids technical objections that the Guarantor has given you something for nothing;
- Ensure the Guarantor gets independent legal advice and confirms receipt of advice in writing;
- If the nature of the relationship with the borrower or lessee changes in any material way, if substantial further funds are advanced, or interest assigned, you should insist on the preparation and signing of fresh Guarantees. Better still, try to anticipate and incorporate the occurrence of substantial variations in your original deed;
- Make it crystal clear what is being guaranteed and when indemnity is given. Vagueness is dangerous and Guarantees are interpreted by the Courts strictly in favour of the Guarantor;
- Ensure that the Guarantor gives you up-front authority and consent to take steps if there is a need to call in the Guarantee (because at that later critical time, it might be very slow in coming);
- Secure the Guarantee. Do this, for example, by way of mortgage or a charge over the Guarantor’s property, with a right to lodge a caveat. During this process, you will conveniently discover what assets are available and how likely the Guarantor is to remain someone of financial substance; and on that point …
- Bear in mind that the Guarantee is only as good as the capacity of the guarantor to meet your claim (and costs) if things go wrong. When being informed of such capacity, “trust but verify”!
For further information please contact Peter on 8362 6400 or email Peter Jakobsen. Join our mailing list to receive updates and advice on current issues.