Giving personal guarantees for a limited company?

by Readers Question

8:06 AM, 5th February 2020
About 9 months ago

Giving personal guarantees for a limited company?

Make Text Bigger
Giving personal guarantees for a limited company?

After buying a number of properties in joint names, my wife and I formed a company in 2019 to continue to build our portfolio. Both mortgage companies that we have used have asked for us to sign personal guarantees and mandated that we receive independent legal advice before we sign the guarantee. I have been quoted over £550 to receive such advice.

Initially I thought signing the guarantee wouldn’t make us any worse off than if we bought the properties outside of a company. However, after the receiving legal advice I’m not so sure. I went into the first session thinking as long as we continued to pay the mortgage and behave professionally there was little to be concerned about. However, one gem we discovered in the small print was that the mortgage company can demand full repayment of the loan within 14 days without reason. You have substantially less protection obtaining a mortgage via a company versus doing it privately.

Presumably there are many landlords on this forum who have been asked to sign similar guarantees? Has anyone any pearls of wisdom to offer? They certainly make you feel uncomfortable… did you just close your eyes and sign? Does anyone know someone who has lost out for no fault of their own by signing such a document? I spoke to one solicitor recently who said you would only sign such a document if you had no other choice. Not inspiring advice.

Many thanks

James


Share this article

Twitter Facebook LinkedIn

Comments

Kay Landlord

9:03 AM, 5th February 2020
About 9 months ago

PGs are rather a commercial covenant and I think grossly unfair for a simple BTL mortgage product even if it’s for a company purchase . if all the lenders are now adopting this For BTL , I don’t see the point of purchasing in a LTD Co ( I appreciate the s24 mitigation, however ) if these terms are now the norm, you might as well go and obtain a vanilla commercial loan. You may be better getting a lump of cash that way which could free you up to purchase as you please. has your broker looked at alternative lenders?

Adrian Alderton

9:06 AM, 5th February 2020
About 9 months ago

James had to do this for a few properties. Solicitor advised that banks just covering their back to avoid issues of owners claiming the company (separate entity) is liable and not them personally or that they didn't understand the concept of personal liability. Haven't spotted the 14 day clause so will look at that.
Its just another additional cost to owning property through a company with slightly higher interest rates, additional fees and accountancy fees.
Shop around for a price as there are huge differences between solicitors, even managed to get it free once with a solicitor we had dome some business with. A few solicitor practices will also use another solicitor from their practice. Check this out with them or a recommendation .

Adrian

Graham Bowcock

9:28 AM, 5th February 2020
About 9 months ago

Hi James

I have used limited companies for over twenty years and the demand for PGs has certainly grown from lenders. Sometimes (as in your case) the lender has asked for advice from another firm, which adds a layer of cost. If you have not done one before then the solicitor advising you will need to take great care to make sure you appreciate the detail of the document, hence the fee quote. Sometimes they allow a different solicitor in the same firm to act, which can save a bit on cost.

The bottom line, though, is that you will have no real option if you are using a limited company. PGs will be required. Very annoying I know, given that they have security over the property. I can report, however, that having signed dozens, I have never once had a problem with them and they work well.

One note of caution - try to avoid the fixed and floating charge. I have run into problems with these and have persuaded new lenders not to insist on them.

Graham

Kabs

10:14 AM, 5th February 2020
About 9 months ago

Yes I obtain mortgage for a house I received the solicitors advice but I signed the papers anyway. But I did feel uncomfortable

Puzzler

12:16 PM, 5th February 2020
About 9 months ago

It's quid pro quo - the lenders have less protection. It is to stop people reneging on repayment and walking away unscathed. You don't need to get independent legal advice outside of your solicitor doing the conveyancing, it means independent from the lender so they can't later be sued on the grounds you didn't understand the terms. Any decent solicitor or conveyancer will have pointed out those terms to you.

Glowmac Properties

14:23 PM, 5th February 2020
About 9 months ago

Reply to the comment left by Graham Bowcock at 05/02/2020 - 09:28
Hi Graham
What do you mean by fixed and floating charges.
The issue of PGs appear a little over bearing demand to secure a mortgage in LTD. If one is buying in private names, we would not have issues of PGs, and to make things more difficult for landlords, the interest rates are slightly higher.
When will landlords ever enjoy the risk they take to invest in properties?

Kate Mellor

15:50 PM, 5th February 2020
About 9 months ago

Reply to the comment left by Puzzler at 05/02/2020 - 12:16
Very often the solicitor is representing the lender and also acting for you. It’s far cheaper and most people do that in order to avoid extra legal costs. That’s why the lender insists on a different firm providing the advice regarding the PG.

Graham Bowcock

9:23 AM, 6th February 2020
About 9 months ago

Reply to the comment left by Glowmac Properties at 05/02/2020 - 14:23
Fixed and floating charges are often taken by lenders to limited companies over and above the charge on the property (and the personal guarantees); in simple terms the lender can have a claim over all of the company's assets.

Problems arise when you have more than one lender as they then have to share the charge; I had one lender that would not share and therefore effectively stopped the company borrowing more money. I now work with lenders who will waive this requirement.

Ian Narbeth

13:02 PM, 6th February 2020
About 9 months ago

Prudent solicitors generally hate providing the separate advice because it is setting them up for a fall. The problem is that the courts bend over backwards to let guarantors off the hook, especially wives/female partners. See e.g. https://www.lexisnexis.com/uk/lexispsl/property/document/412012/5Y4S-B1K3-GXFD-843D-00000-00/Wife%E2%80%99s-guarantee-to-bank-unenforceable-due-to-husband%E2%80%99s-undue-influence-%28Syndicate-Bank-v-Dansingani%29
The separate advice is designed to prevent the guarantor from pleading ignorance or undue influence. If the guarantor ever successfully avoids liability and the lender suffers loss the lender wants to be able to sue the solicitor. £550 is actually quite modest given the work required and the responsibility taken on. If only one in 500 cases goes wrong the solicitor's firm might as well not bother with this line of work.

I would astonished if the guarantee allows the lender to demand payment on 14 days notice absent a default by the company. You should not have accepted that provision.

Ian Morgan

8:08 AM, 8th February 2020
About 9 months ago

We had to do one for Kent Reliance, used an independent solicitor. They "interviewed" my wife and I separately checking for undue influence and all of that, much to my amusement. Obviously the providers are looking after their interests as mentioned above. Cost for us was only £200, and I wasn't happy paying out more money. £500 plus would make me weep!

1 2

Leave Comments

Please Log-In OR Become a member to reply to comments or subscribe to new comment notifications.

Forgotten your password?

OR

BECOME A MEMBER

Protect Your Wealth In Property In 2021

The Landlords Union

Become a Member, it's FREE

Our mission is to facilitate the sharing of best practice amongst UK landlords, tenants and letting agents

Learn More