What is a Deed of Guarantee & Indemnity?
A deed of guarantee and indemnity is a type of binding legal contract, which in simple terms, means that a third party promises that the duties of another party will be fulfilled. These agreements are common in the contexts of loans and commercial financing, as it provides the lender with protection from a borrower not fulfilling their obligations.
For example, a party (the borrower) borrows money from a lender (the beneficiary). The beneficiary will seek to have this arrangement guaranteed by a third party (the guarantor), who may be an individual or a company. In this arrangement, the guarantor is promising that the obligations of the borrower to the beneficiary will be complete.
If a borrower fails to perform their duties under the agreement with the lender, and a deed of guarantee and indemnity exists, then the guarantor will be responsible to fulfil the duties on behalf of the borrower.
Lenders will often seek to include a deed of guarantee and indemnity if they are uncertain about the borrower’s ability to repay the loan.
What is a Guarantee?
A deed of guarantee is a promise made by a person or company, which ensures that the obligations made between another party and the beneficiary will be met. In the case that the borrower defaults on their payments or cannot fulfil other obligations under their loan agreement, the beneficiary will seek that the guarantor is responsible to complete the duties.
Put simply, the guarantor is promising to fulfil the obligations of the borrower if they fail to do so.
The guarantor may be responsible in ensuring that the borrower completes its obligations, or they may be liable to pay the amount owed under the loan.
What is an Indemnity?
A deed of indemnity is a promise by a party, that they will compensate for loss suffered by another party. In other words, it is a promise that a party will accept liability for loss that someone else may incur.
In the context of loans, a deed of indemnity usually means that a party is promising the lender that they will compensate them for any loss suffered by a default from the borrower.
What to Consider Before Guaranteeing a Loan?
Entering into an arrangement with yourself as guarantor of a loan, brings with it numerous responsibilities and risks.
Before signing on as guarantor you should identify who the borrower is and how likely they are to default on their repayments. If for example, they have a bad credit rating, this may indicate they are more likely to default, and as such, would put you in a high risk situation.
You should ensure it is clear on what you are actually guaranteeing. You may be guaranteeing all the amounts payable under the loan agreement, which is likely to include interest payments and indemnity costs. Furthermore, you may also be guaranteeing any non-monetary obligations of the borrower, which may include providing the lender with certain information.
Ensuring you are in a suitable financial position is essential before entering into an agreement as guarantor. In the event of default by the borrower, you may be required to pay a large sum of money.
Lastly, failure on behalf of the guarantor to make the required repayments, may result in resorting to taking out a mortgage on a home or even selling assets in order to make the payments.
A deed of guarantee and indemnity is an effective tool for protection of lenders and financiers. Yet, for the party guaranteeing the agreement, it brings with it a lot of risks and duties.
It is highly recommended to seek legal advice before agreeing to be guarantor of a loan.
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