A Deed of Guarantee is a binding legal document under which one party (the guarantor) agrees to guarantee that certain obligations of another party will be met. In doing so, if this other party fails to meet its obligations, the guarantor is then required to step in and meet them.
Deeds of Guarantee are commonly used in the context of loans and debt repayment. For example, a lender may wish for a loan arrangement to be guaranteed by a third party if the lender is uncertain as to whether the borrower will be able to repay their loan and thus concerned about the risk of default.
In order to execute a deed, it must be in writing, signed by the parties at hand, sealed and delivered. However, some documents have ‘execution blocks’ which stipulate that the deed has been ‘signed, sealed and delivered’ and it is important to note that if this is the case, a seal being physically placed on the document is not needed for the ‘sealed’ requirement to be fulfilled. Further, ‘delivery’ occurs when the parties intend to be bound by the deed and hence generally refers to the date from which the deed is in effect.
Additionally, in NSW a deed must also be witnessed by someone who is not a party to it.
Guarantee vs Indemnity
Whilst a Deed of Guarantee ensures that obligations will be met, a Deed of Indemnity stipulates that one party will compensate for loss suffered by another party. For example, with respect to a loan arrangement, a Deed of Indemnity generally means that one party will compensate the lender for any loss incurred if the borrower actually does default on their loan.
The two deeds can be used together to yield a ‘Deed of Guarantee and Indemnity’ but they can also be used independently.
What to Consider Before Becoming a Guarantor
Being a guarantor, especially in a loan or debt repayment arrangement, involves significant responsibilities and risks.
Before signing as a guarantor, it is important to look at the borrower at hand and their risk of default. Good indicators of this risk are the borrower’s credit score and the corresponding credit report. Keep in mind that different credit agencies have different algorithms and scales that calculate credit scores and thus different values as to what is considered a ‘good’ or ‘bad’ score. For example, an ‘excellent’ Equifax credit score is between 833 and 1200 out of 1200 but an ‘excellent’ Experian credit score is between 800 and 1000 out of 1000.
Further, ensure that you have a strong understanding of the terms surrounding what you are guaranteeing and what is specifically required if you do have to step in. For example, in guaranteeing a loan arrangement, payment of both the amount borrowed and the corresponding interest may be stipulated.
In light of such potential payments, being in an appropriate financial position is essential when considering whether to be a guarantor.
A Deed of Guarantee is a legally binding document within which one party (a guarantor) agrees to guarantee that the obligations of another party are fulfilled; if the other party fails to meet their own obligations the guarantor becomes responsible for meeting them. The Deed must be signed, sealed, delivered and witnessed and can be used in conjunction with a Deed of Indemnity to yield a ‘Deed of Guarantee and Indemnity.’ Further, there are certain risks and responsibilities associated with being a guarantor and in turn, there are many considerations that should precede the decision to become a guarantor.