What is a personal guarantee?
A personal guarantee (PG) is a legally binding commitment by an individual to be personally liable for the debts or obligations of a company. In development finance, lenders typically require directors and shareholders of the borrowing special purpose vehicle (SPV) to provide personal guarantees for all or part of the loan facility.
The guarantee sits alongside the primary security (the first legal charge over the development site) and gives the lender an additional layer of protection. If the SPV defaults and the security is insufficient to repay the loan in full, the lender can pursue the guarantors personally for the shortfall.
Personal guarantees are standard practice in UK development finance. They exist because development projects carry inherent risk — construction can go wrong, markets can shift, and costs can overrun. The guarantee ensures that borrowers have meaningful personal skin in the game, aligning their interests with the lender's.
Types of personal guarantee
Unlimited personal guarantees cover the full amount of the facility plus interest, fees, and enforcement costs. The guarantor's exposure is not capped. This is the most common type in development finance and represents the greatest personal risk.
Capped personal guarantees limit the guarantor's exposure to a specific amount, expressed either as a fixed sum or a percentage of the facility. For example, a guarantee capped at 25% of a GBP 2 million facility would limit personal exposure to GBP 500,000. Capped guarantees are negotiable but require strong borrower credentials.
Reducing guarantees decrease as the project progresses. For example, the guarantee might reduce by 25% when the building reaches practical completion, and by a further 25% when a specified number of units are sold. This structure rewards developers for reducing project risk through progress.
Cost overrun guarantees are limited to covering construction cost overruns beyond the contingency built into the facility. The guarantor is not liable for the principal debt, only for additional costs if the build exceeds budget. Some lenders offer this as a middle ground.
How lenders enforce personal guarantees
Enforcement typically begins with a formal demand letter to the guarantor, requiring payment within a specified period (usually 14 to 30 days). If payment is not made, the lender will instruct solicitors to commence legal proceedings.
The lender can obtain a county court judgment (CCJ) or high court judgment against the guarantor, which can then be enforced through various mechanisms: charging orders against the guarantor's property, third-party debt orders against bank accounts, attachment of earnings orders, or ultimately a bankruptcy petition.
In practice, most lenders prefer to negotiate a settlement rather than pursue bankruptcy. Bankruptcy is expensive, time-consuming, and often recovers less than a negotiated outcome. However, developers should not rely on lender forbearance — the legal right to enforce exists, and some lenders (particularly those that have securitised or sold their loan book) will enforce aggressively.
It is worth noting that personal guarantees survive the company. If the borrowing SPV is wound up or dissolved, the personal guarantee remains enforceable against the individual guarantors. You cannot escape a PG by closing the company.
Negotiating your personal guarantee
The scope for negotiation depends on the borrower's track record, the deal's risk profile, and the lender's appetite. Experienced developers with a strong history of successful completions are in the best position to negotiate favourable guarantee terms.
Key areas to negotiate include the cap on liability, the scope of the guarantee (full facility vs cost overruns only), reduction mechanisms tied to project milestones, and the release timeline (how quickly the guarantee falls away after loan repayment). Some borrowers also negotiate for the guarantee to be joint and several among multiple directors, with contribution rights between them.
When presenting a deal to lenders, a well-structured credit paper that clearly articulates the risk mitigants — conservative GDV assumptions, adequate contingency, experienced contractor, strong pre-sales — strengthens the case for a limited guarantee. Platforms like Assesr can help by generating comprehensive credit papers that highlight these mitigants clearly for lenders.
Joint and several liability
Where multiple individuals guarantee a facility, lenders typically require the guarantees to be joint and several. This means the lender can pursue any individual guarantor for the full guaranteed amount, not just their proportionate share. If one guarantor cannot pay, the others bear the burden.
This creates significant risk in joint ventures and partnerships. If your JV partner provides a personal guarantee alongside yours, and they subsequently become insolvent, you could be liable for the entire guaranteed amount. Guarantors in this situation should consider entering into a separate contribution agreement between themselves, setting out how liability will be shared.
Family situations also require careful consideration. If a spouse or family member is a co-director or shareholder of the SPV, they may be required to provide a guarantee. Independent legal advice is essential in these circumstances, and many lenders now require certificates confirming that independent advice has been taken.
Protecting yourself
The most effective protection is structuring deals conservatively so that the PG is never called. This means maintaining adequate equity, building realistic contingencies into budgets, and ensuring exit routes are clearly identified. The guarantee should be a backstop that never needs to be used, not a substitute for proper deal structuring.
Beyond deal structuring, practical steps include ensuring your personal assets are appropriately protected (within the bounds of the law — fraudulent transfers can be unwound), maintaining personal liquidity, and keeping detailed records of all project decisions and communications. If a guarantee is ever enforced, good records can be essential in defending against claims of negligence or misrepresentation.
Finally, always take independent legal advice before signing a personal guarantee. The solicitors acting for the lender are not acting for you — their duty is to the lender. Engage your own solicitor to review the guarantee terms, explain the implications, and negotiate amendments where possible.