Posted: Thursday, 21 June 2012 @ 10:14
It is a mistake to assume that personal gurantees to banks are always enforceable. It is true to say that these days the high street banks usually have watertight paperwork and have covered off any potential loophole, but one recent case demonstrates how a lender can get it wrong with the result that the guarantee in unenforceable.
My client was a relative of the lender’s client. The lender was not a high street bank. My client guaranteed payment by the borrower to the lender. He obtained “independent” legal advice at the request of the lender, although that had a rather questionable feel to it, involving a solicitor recommended by the lender located many miles away, a mad dash late in the day to their offices, and a hurried advice. But what proved to be the Achilles Heel for the lender was their failure to carry out their side of the bargain.
The guarantee document made it clear that the lender would be taking securities on 2 properties owned by the borrower, in the forms of 2 legal charges. The guarantee did not make any allowance for any variation of the terms. It did not allow the lender to alter the terms without my client’s agreement. My client signed the guarantee document in reliance on this representation by the lender. The lender failed to take out one of the charges, and later tried to enforce the guarantee. I advised my client that in his case the lender could not enforce the guarantee. My client had been prejudiced by the lender’s failure to take the 2 charges. The lender, without agreement, had varied the underlying contract with my client. This had the effect of discharging the personal guarantee. The legal principle is known as the law in Holme v Brunskill.
So do not assume that all bank guarantees are enforceable. When faced with a demand under a personal guarantee, it is best to take urgent legal advice before taking any steps towards negotiation with the lender.
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