Personal or director guarantees are commonplace in many commercial contracts. Common transactions that will generally require a personal guarantee include:
- any business purchase;
- commercial leases;
- loans; or
- trading terms and credit applications.
In such instances the personal guarantee will generally be from one or all the directors of the company.
What is a Charging Clause?
A charging clause is a special clause sometimes found within a personal guarantee which gives a creditor security over the assets of a guarantor. This goes beyond the guarantor being merely liable for the debts of the debtor (which is a serious matter in itself) and affords to the creditor additional powers and options for pursing the guarantor if the principal debtor is unable to pay.
A simplified wording of a charging clause (a simplified example only) is set out below:
“I charge for payment and performance of the debtor’s obligations all my legal and equitable interest in my property, including real property, howsoever held”
This means that the guarantor is offering all of the following personally owned property as security for the debtor’s payment obligations:
- real property
- personal property
The most important aspect to note is that this charging clause can extend to security over real property (i.e. land or house), held solely or jointly by the guarantor. The effectiveness of the charging clause depends on the quality of the clause and the type of property owned by the guarantor.
How is a Charging Clause Enforced on Real Property?
Where a personal guarantee is provided with a charging clause and the debtor has defaulted, the creditor can call upon the guarantor to satisfy the debt. Additionally, the creditor may register a ‘caveat’ over any real property owned by the guarantor such as the family home.
The purpose of the caveat is that it can stop the owner dealing with the property pending satisfaction of the creditor’s claim. The creditor can then pursue court action with the assurance that the property will not be sold in the meantime.
A similar strategy can be employed for other types of property.
3 Tips for Directors and Guarantors on charging clauses
The key takeaways are:
- Directors and guarantors must not take guarantees lightly and always understand what they are signing up to when they are agreeing to provide a personal guarantee.
- It is always important to read and fully understand the guarantees being provided, and where a charging clause is involved, negotiate strict drafting of its application if possible.
- Directors should maintain records of all guarantees signed in the course of business (if any) to ensure up to date information about personal exposure.
- Suppliers and creditors should review their guarantee terms and consider a well drafted charging clause.
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Daniel Dash and Zahra Rashedi are part of the commercial law team at NB Lawyers – lawyers for employers working with individuals and business owners on a range of matters including business sales, property disputes, estate disputes, shareholder agreements, intellectual property, litigation and taxation matters.