Before You Sign: What Guarantors Should Understand About Personal Guarantees

Being asked to act as a guarantor — for a business loan, commercial lease, franchise or supplier account — is a serious commitment that is often presented as a formality. In practice, a guarantee can put a family home, other assets and future income at risk, sometimes long after the underlying business has ceased to trade. Lenders and landlords increasingly require, or strongly recommend, that a proposed guarantor receive independent legal advice before signing, and there are good reasons for that.

What a personal guarantee actually does

A guarantee is a promise to pay another party's debts if that party defaults. It is generally an "all monies" or defined-limit obligation, and can extend to interest, enforcement costs and future advances depending on the drafting. Many guarantees are also supported by a mortgage over real property or a security interest under the Personal Property Securities Act 2009 (Cth), turning the guarantee into a secured obligation.

Special rules where the guarantor is a consumer

Where the underlying credit is regulated by the National Consumer Credit Protection Act 2009 (Cth), or the guarantee is given by a natural person for consumer credit, additional protections apply, including obligations about the form of the guarantee, information provided, and circumstances in which enforcement is permitted. Guarantees given for a small business under an industry code, such as the Banking Code of Practice, can attract additional standards around independent advice and unfair terms.

Undue influence, unconscionable conduct and the "special disadvantage" cases

Courts have long recognised that guarantees given by spouses, parents and other relatives for a family member's business can be set aside in limited circumstances where there has been undue influence, unconscionable conduct, or a failure by the lender to ensure the guarantor understood the transaction. The line of authority stemming from Yerkey v Jones and refined by later High Court decisions is fact-specific, but it remains one reason lenders insist on independent advice certificates.

What independent advice looks like

Independent legal advice is not a rubber stamp. It typically involves reviewing the credit contract, security documents, disclosure statements and any related lease or shareholder documents, explaining the obligations in plain English, and confirming the guarantor understands the worst-case outcome. It is also an opportunity to consider whether the exposure can be reduced through a capped guarantee, carve-outs, or requiring co-guarantees.

If things go wrong

If the primary debtor defaults, options for the guarantor may include negotiating with the lender, refinancing, seeking release, or raising defences under the credit or consumer protection legislation. The earlier advice is taken, the more room there generally is to shape an outcome.

Practical steps you may wish to consider

Read the guarantee, credit contract and any security documents in full before signing
Ask whether the guarantee can be capped, time-limited or replaced with alternative security
Understand which assets are exposed — particularly the family home
Take independent legal and, where appropriate, financial advice
Act early if the primary borrower shows signs of financial stress

This article contains general information only and does not constitute legal advice. Envision Legal accepts no liability for any loss arising from reliance on this content. You should seek independent legal advice tailored to your specific circumstances. For enquiries, contact Envision Legal.