A Personal Guarantee Agreement is a legally binding document under which an individual (the guarantor) assumes personal responsibility for the obligations of another person or company (the principal debtor) to a creditor, in the event that the principal debtor fails to perform those obligations. In England and Wales, personal guarantees must comply with section 4 of the Statute of Frauds 1677, which requires a guarantee to be evidenced in writing and signed by the guarantor — an oral guarantee is completely unenforceable.

Under English law, a guarantee is a secondary obligation: the guarantor's liability arises only if and when the principal debtor defaults. This distinguishes a guarantee from an indemnity, which is a primary obligation under which the indemnifier is liable regardless of whether the principal debtor is liable. The secondary nature of a guarantee means it must comply with the Statute of Frauds and the guarantor's potential liability cannot exceed that of the principal debtor. If the underlying obligation is void or unenforceable, the guarantee generally falls away with it.

The law of personal guarantees has been significantly shaped by two landmark House of Lords decisions. In Barclays Bank plc v O'Brien [1994] 1 AC 180 and Royal Bank of Scotland v Etridge (No 2) [2001] UKHL 44, the courts established the principles governing when a guarantee may be set aside on grounds of undue influence or misrepresentation, and the steps creditors must take to protect the enforceability of guarantees obtained from individuals who have a close personal relationship with the principal debtor. The 'Etridge principle' — requiring independent legal advice for guarantors who have personal relationships with the debtor — is now standard commercial practice.

A well-drafted Personal Guarantee Agreement should include a clear description of the guaranteed obligations, a maximum liability cap expressed in pounds sterling, a demand notice procedure, and provisions addressing the common law defences available to guarantors (such as the rule in Holme v Brunskill (1878) 3 QBD 495, which discharges a guarantor if the creditor materially varies the underlying agreement without the guarantor's consent). Our template incorporates all of these key provisions and is governed by the laws of England and Wales.

A Personal Guarantee Agreement is required across a wide range of commercial and personal situations in England and Wales, wherever a creditor requires additional security beyond the assets of the principal debtor.

Commercial lending is the most common context. When a bank or other lender extends a loan, overdraft, or credit facility to a limited company, it will routinely require one or more directors or shareholders to provide a personal guarantee. Because a limited company has separate legal personality under the Companies Act 2006, the company's debts are not automatically those of its directors. A personal guarantee pierces this corporate veil and creates direct personal liability for the guarantor if the company defaults.

Commercial lease transactions frequently require personal guarantees. When a landlord grants a commercial lease to a company, the landlord may require a director to personally guarantee the company's obligations under the lease, including rent payments, service charges, and dilapidations. This is particularly common for new or growing businesses that cannot demonstrate a sufficient financial track record.

Supplier and trade credit arrangements may also require guarantees. A supplier who provides goods or services to a limited company on credit terms may require a director's personal guarantee to protect against the risk of non-payment, particularly when dealing with a new or financially weak customer.

Intra-group lending between companies in the same corporate group often involves a parent company guaranteeing the obligations of a subsidiary, or a holding company providing a guarantee to support a subsidiary's trading. While technically a corporate guarantee, the underlying legal principles are similar to those governing personal guarantees.

Personal guarantees are also used in private lending arrangements between individuals, where a third party guarantees the borrower's obligations under a personal loan agreement. This is common where the borrower's creditworthiness is uncertain and the lender requires additional comfort that the debt will be repaid. The guarantor should always seek independent legal advice before signing, given the potentially significant financial consequences of the principal debtor's default.

Compliance with the Statute of Frauds 1677 is the threshold requirement for a personal guarantee to be enforceable. Section 4 of the Act requires the guarantee to be evidenced in writing and signed by the guarantor. The written document must identify the guarantor, the principal debtor, the creditor, the scope of the guaranteed obligations, and the consideration (which is typically the creditor's agreement to enter into or continue the arrangement giving rise to the guaranteed obligations).

The scope of the guaranteed obligations must be precisely defined. The guarantee may cover all sums owed by the principal debtor to the creditor, however arising (an 'all-monies' guarantee), or it may be limited to specific obligations under a particular agreement. The guarantor should ensure they understand precisely what they are guaranteeing, as the scope directly determines their potential financial exposure.

The maximum liability cap is a critical protection for the guarantor. Without a cap, the guarantor's exposure is unlimited and could extend to all the debts of the principal debtor. The cap should be expressed as a specific monetary amount in pounds sterling and clearly state whether it includes or excludes interest, legal costs, and other expenses.

The demand notice provisions specify the procedure the creditor must follow before calling on the guarantee. Typically, the creditor must give the guarantor a specified number of days' written notice identifying the amount of the principal debtor's default. This gives the guarantor an opportunity to remedy the default or obtain payment from the principal debtor before the guarantee is enforced.

The independent legal advice confirmation, following the Etridge principle, is strongly recommended. The guarantor should confirm in the agreement that they received advice from a named solicitor who is independent of both the creditor and the principal debtor. This significantly reduces the risk of the guarantee being set aside for undue influence.

The waiver of defences clause, based on the rule in Holme v Brunskill (1878) 3 QBD 495, prevents the guarantor from being automatically discharged from liability if the creditor varies the underlying agreement, grants extensions of time, or releases security without the guarantor's consent. Such clauses are standard in commercial guarantees and are generally upheld by English courts.

The subrogation and subordination provisions protect the creditor's interests by ensuring the guarantor cannot compete with the creditor in recovering from the principal debtor until all the guaranteed obligations are fully discharged.

Governing law and jurisdiction must be stated as England and Wales, ensuring the guarantee is interpreted under English law and that any disputes are resolved by the English courts.