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Directors guarantee | Personal Guarantees by Directors

25/03/2020

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Directors of a company are required to give personal guarantees when getting a mortgage to purchase a property.

5 risks of a Directors Guarantee
Some mortgage lenders offer more favourable terms where as as others have more draconian terms. These terms should be explained to the director in an Independent Legal Advice meeting with a qualified solicitor prior to signing the mortgage deed. 

    1
    How much is the director guaranteeing?

The total liability the director is liable for is different depending on the mortgage lender and can be (listed from good to bad):

  • Fixed Sum - the current loan amount at the time of repayment.
  • Current loan plus costs - the current loan amount at the time of repayment and the lender's costs, fees and expenses.
  • Current loan, further borrowing and costs - this covers any future borrowing with the same lender.
  • All possible losses - this is the worst mortgage term as it exposes the director to all possible losses that could possibly be incurred by the lender as a result of transacting with the borrower.

Example 1
Guaranteed Obligations: the mortgage debt and all present and future payment obligations and liabilities of the Borrower due, owing or incurred under the Finance Documents to the Lender (including without limitation, under amendment, supplement or restatement of the Finance Documents or in relation to any further or increased advances or utilisations).

Example 2
"loan" means the total amount of money we lend you at the start of our agreement with you plus any additional amounts we lend you from time to time (whether or not pursuant to our initial agreement with you). This will include any further advances and any amount that you do not pay us when you're supposed to, for example fees and expenses. The initial amount of the loan is set out in the mortgage offer letter

Example 3
The initial Advance we make to you, and any Additional Borrowing, together with any Fees that are specified to be added to the Loan from time to time which are secured by the Mortgage.

Example 4
The total amount owing from time to time under the offer and these conditions, including any arrears and all interest and expenses which become owing under the mortgage.

Example 4
You agree that the security created by the mortgage deed is our security not only for the debt but also for any other money that you now owe us or may owe us in the future on any account, whether actually or contingently, whether as principal or surety and whether solely or jointly with any other person.

The above guarantees a liability that is greater the original mortgage debt.

    2
    What is the risk if the company misses a mortgage repayment?

The company needs to meet all mortgage repayments on time, however if it misses one the lender can take action depending on what is in their terms.

  • the missed payment - the lender just requires the repayment of the missed mortgage payment.
  • the whole debt - this would mean the whole debt would be repayable, and as we've seen from section 1, this could be just the mortgage debt, or it could be all possible losses.

Here is an example of if the whole debt would need repaying:
In consideration of the Lender entering into the Finance Document, each Guarantor guarantees to the Lender to pay on demand the Guaranteed Obligations.

This type of clause allows for the mortgage lender to call upon the mortgage debt on demand at any time; even if the Borrower hasn't breached the mortgage lender's terms and conditions.

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    3
    What is the key trigger for the director's to repay the mortgage?

These are key triggers whereby the directors would be required to repay their mortgage obligation to the lender (in risk order).

  • A missed payment by the directors which has not been paid when the lender has notified them of the missed payment
  • A missed payment (with no notification required)
  • any breach of the mortgage terms by the company (no matter what the breach was)
  • No trigger required. The mortgage lender can call in the guaranteed mortgage obligation (from section 1 above) 'on demand' i.e. whenever it wants

What is the legal definition of 'On Demand'?

"must be repaid on the demand of the lender"


personal guarantees by directors
    4
    How long does the Directors Guarantee last for?

The directors guarantee starts from the date it is executed on completion however when does it end?

  • until the debt is repaid
  • until cancelled by the director
  • until the lender decides to cancel it
  • No right of termination. The personal guarantee lasts forever, even when the director is no longer an owner, director, shareholder or officer of the company.

    5
    How long is the notice/grace period?

Most directors guarantees are drafted such that lenders are not required to write to the Director to inform them of their intention to call upon the guarantee. Most of the lenders are also not required to give the director any "grace period" I.e. any time before payment needs to be made.

When the company and the director cannot make payment for the mortgage payment then the mortgage lender can petition for the director's bankruptcy after 21 days.

Would the mortgage lender really call upon the guarantee?

When a company stops paying its mortgage repayments, whatever the reason be it because their tenant moved out or it has run into cash flow problems, the mortgage lender will want to protect its asset. The options for the lender are:

  • Request payment of the missed payment
  • Call upon the whole debt under the mortgage terms (whatever is in section 1 above)
  • Sell on the debt to another lender.

Whilst there is more leniency given for residential mortgages, when the debt is with a company the banks take more immediate action.

How do you reduce the risk of a directors guarantees?
It is a requirement of the mortgage that every director providing a personal guarantee obtains independent legal advice. During this meeting the solicitor explains the terms of the mortgage lender and how these personally affect the company director. After the meeting the solicitor provides a letter confirming the legal advice and the guarantee document is signed. The lender may also want the mortgage deed signed in the presence of the solicitor. At SAM Conveyancing we have a solicitor on hand to help with independent legal advice - get in contact and see how we can help 0207 112 5388.

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