As part of a loan, a lender may require a third party, usually related to the borrower, such as mum & dad, shareholder or director of a company (also called a director’s guarantee and indemnity), trustee or appointers of a trust to guarantee a loan.

The guarantor promises to repay the loan if the borrower cannot, and often, the lender may receive interest in the guarantor’s asset as security. In the event of default, the lender can first enforce the guarantee against the guarantor to repay the loan and/or have the guarantor indemnify the lender for loss suffered because of the default by the borrower.

What is a Deed of Guarantee and Indemnity?

A deed of guarantee and indemnity for a loan is a legal document that creates a binding obligation for a guarantor to fulfill the obligations of the borrower or debtor if they fail to meet their commitments under a loan. This deed not only ensures that the guarantor steps in to perform the obligations but also provides an indemnity, which protects the lender from losses arising from the borrower’s failure to comply with their obligations

For guarantors, it is important for this document to be independently reviewed by a lawyer, as a default by the borrower could lead to the guarantor losing personal assets.

Key Legal Issues for a Deed of Guarantee and Indemnity for a Loan

Below are some key issues to consider when negotiating a deed of guarantee and indemnity:

• Guarantor’s obligations – this outlines the guarantor’s responsibilities to fulfill the obligations of the borrower or debtor.
• Indemnity provisions – this ensures the lender is compensated for any losses or damages resulting from the borrower’s failure to meet their obligations.
• Scope of liability - this defines the extent of the guarantor’s liability, including the amount guaranteed, guarantee period or any other exclusions.
• Termination conditions - this specifies the circumstances under which the guarantor’s obligations will cease.
• Enforcement rights – this details the lender’s rights to enforce the guarantee and indemnity if the borrower defaults.

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The risks and considerations associated with a deed of guarantee and indemnity are different depending on if you are the lender or the guarantor. Our commercial lawyers will work with you to ensure that the deed is legally sound and tailored to your specific needs and best protects your legal interest.