Personal Guarantees in Development Finance: What You're Really Signing

Personal guarantees are a standard feature of almost every development finance facility in the UK. The reason is straightforward: development loans are typically advanced to special purpose vehicles (SPVs) — limited companies set up specifically for the project — which have no assets other than the development itself. If the project fails and the sale of the development does not generate sufficient proceeds to repay the loan, the lender would have no further recourse without a personal guarantee. The guarantee provides the lender with a secondary source of repayment from the personal assets of the developer or the directors and shareholders of the borrowing company.

From the lender's perspective, a personal guarantee serves two purposes. First, it provides genuine financial recourse — if the development is sold at a loss, the lender can pursue the guarantor personally for the shortfall. Second, and perhaps more importantly, it aligns the developer's personal interests with the project's success. A developer who has guaranteed a £3,000,000 facility with their personal assets has a powerful incentive to manage the project diligently, control costs, and maximise the exit value. Lenders view this alignment of interests as an important risk mitigant.

In our experience arranging hundreds of development finance facilities, only a small minority of lenders offer genuinely non-recourse development finance — and those that do typically require lower LTV ratios (fifty to fifty-five percent of GDV compared to sixty-five to seventy percent with a guarantee), higher interest rates, and more experienced developer track records. For most developers, particularly those with fewer than ten completed projects, a personal guarantee is a non-negotiable requirement of securing development finance at competitive terms.

Not all personal guarantees are the same, and understanding the differences is critical before signing. The broadest form is an unlimited personal guarantee, which makes the guarantor liable for the entire outstanding debt plus all costs, fees, default interest, and enforcement expenses incurred by the lender. On a £4,000,000 facility that defaults and incurs £200,000 in enforcement costs, an unlimited guarantee exposes the guarantor to the full £4,200,000 shortfall after the sale of the development.

A limited personal guarantee caps the guarantor's liability at a specified amount — typically expressed as a percentage of the facility. A guarantee limited to twenty-five percent of a £4,000,000 facility caps personal liability at £1,000,000, regardless of the actual shortfall. Limited guarantees are clearly preferable for borrowers, and in our experience, many lenders will accept a limited guarantee in the range of fifteen to thirty percent of the facility for experienced developers with strong track records.

Some guarantees are limited in scope rather than amount. For example, a cost-overrun guarantee limits the guarantor's liability to costs incurred above the approved build budget — effectively guaranteeing that the guarantor will fund any budget overruns from personal resources. Similarly, an interest guarantee covers only the interest on the facility, not the principal. These targeted guarantees are sometimes available from lenders who are comfortable with the security value but want protection against specific risks.

A further distinction is between joint and several guarantees and several-only guarantees. In a joint and several guarantee (which is the most common form), each guarantor is liable for the full guaranteed amount — meaning the lender can pursue any one guarantor for the entire liability, regardless of how many guarantors there are. In a several-only guarantee, each guarantor is liable only for their proportionate share. If you are entering a joint venture development, the distinction between joint and several versus several liability is critically important, and you should insist on clear apportionment of guarantee liability between the JV partners. For more on JV structures, see our guide on mezzanine finance versus equity joint ventures.

A personal guarantee creates a direct, personal obligation on the guarantor. If called upon, the lender can pursue any of the guarantor's personal assets to recover the guaranteed amount. This includes: cash savings and investments, other property owned by the guarantor (including their family home, subject to certain protections discussed below), shares in other companies, vehicles, and any other assets of value. The lender can also seek a court order to intercept income, including salary, dividends, and rental income from other properties.

The family home deserves special attention. If the guarantor's home is held in joint names with a spouse or partner who is not a party to the guarantee, the lender cannot simply seize and sell the home. However, the lender can obtain a charging order over the guarantor's beneficial interest in the property, which effectively creates a charge that must be paid when the property is eventually sold. In extreme cases, the lender can apply for an order for sale, although courts are reluctant to grant such orders where it would render the guarantor's family homeless, particularly where there are children. This is a complex area of law, and guarantors should take independent legal advice before signing.

If the guarantor cannot pay the guaranteed amount, the lender may petition for bankruptcy. Bankruptcy has severe consequences: the guarantor's assets are placed under the control of a trustee in bankruptcy, they may be prohibited from acting as a company director, and their credit rating will be destroyed for a minimum of six years. The threat of bankruptcy proceedings is a powerful tool that lenders use to compel payment, even where the guarantor claims to have insufficient assets to satisfy the guarantee. In our experience, bankruptcy petitions are relatively rare in development finance — most lenders prefer to negotiate a settlement — but the possibility should not be discounted.

One area that catches many developers by surprise is the interaction between personal guarantees and other business interests. If you have guaranteed a development loan and that loan defaults, the stress on your personal finances can affect your ability to service other borrowings, maintain deposits on other development sites, and satisfy the credit requirements of other lenders. A personal guarantee default can therefore have a cascading effect across your entire property portfolio. This is why we always advise developers to assess their total guarantee exposure across all facilities and ensure they have a clear picture of their worst-case personal liability.

While personal guarantees are typically non-negotiable in principle, the terms of the guarantee are often negotiable in practice. The most important negotiation point is whether the guarantee is limited or unlimited. We always push for limited guarantees on behalf of our clients, and in many cases we have negotiated guarantee caps of fifteen to twenty-five percent of the facility amount. The key factors that support a lower guarantee cap are: a strong developer track record, conservative LTV (below sixty percent LTGDV), a well-located development with strong comparable evidence, and the availability of other security (such as a second charge over the developer's other assets).

Another important negotiation point is the mechanism for release of the guarantee. Many guarantees provide that the guarantee is automatically released when the facility is repaid in full. However, some guarantees contain provisions that allow partial release as the facility balance reduces — for example, the guarantee reducing pro rata as units are sold and the loan balance decreases. We negotiate for partial release wherever possible, as it rewards the developer for achieving sales and reduces their exposure progressively throughout the sales period.

The guarantee documentation should be reviewed carefully by the guarantor's own solicitor — not the lender's solicitor, who acts for the lender and cannot advise the guarantor. Key provisions to scrutinise include: the scope of the guarantee (does it cover principal only, or also interest, fees, and enforcement costs?), the circumstances in which the guarantee can be called (only after the security has been realised, or at any time following default?), any provisions requiring the guarantor to make payments on demand, and the governing law and jurisdiction for any disputes.

In our experience, the most effective way to negotiate a favourable guarantee is to present the lender with a comprehensive picture of the developer's personal net worth and existing commitments. A developer with a personal net worth of £2,000,000 and no other guarantee exposures is a stronger guarantor than one with the same net worth but £1,500,000 of existing guarantee liabilities. Providing a detailed personal financial statement, including assets, liabilities, income, and commitments, demonstrates transparency and gives the lender confidence that the guarantee has substance. Contact our deal room for help structuring your guarantee position on a new or existing facility.

A personal guarantee is typically called after the development has been sold (either by the developer or by a receiver) and the proceeds are insufficient to repay the lender in full. The lender will serve a formal demand on the guarantor for payment of the guaranteed amount (or the actual shortfall, if less than the guarantee cap). The demand will specify a payment deadline — typically fourteen to twenty-eight days — after which the lender will pursue enforcement action.

Upon receiving a demand, the guarantor should immediately seek specialist legal advice. The solicitor will review the guarantee documentation, assess whether the demand is valid (checking that the lender has properly realised its security and that the amount demanded is correctly calculated), and advise on the guarantor's options. These options include: paying the demanded amount in full, negotiating a settlement for a reduced amount, offering a payment plan, or challenging the demand on legal grounds (for example, if the lender failed to act in good faith in realising the security).

Settlement negotiations are common in personal guarantee disputes. Lenders know that pursuing a guarantor through the courts is time-consuming and expensive, and that the outcome is uncertain — particularly if the guarantor's assets are limited or difficult to realise. A lender may accept a settlement of fifty to seventy percent of the demanded amount if it can be paid quickly and without the cost and delay of litigation. We have seen settlements negotiated for as little as thirty percent of the original demand where the guarantor engaged early, provided full financial disclosure, and made a realistic offer.

If the guarantor cannot pay and no settlement is reached, the lender will typically commence legal proceedings. The most common route is a claim in the High Court or County Court for the guaranteed amount, followed (if judgment is obtained) by enforcement of the judgment through charging orders over property, third-party debt orders to freeze bank accounts, and ultimately a bankruptcy petition if the debt remains unpaid. The litigation process can take twelve to eighteen months and costs both parties significant legal fees — which is why most personal guarantee disputes are resolved through negotiation rather than trial.

The best time to protect yourself against personal guarantee liability is before you sign the guarantee — not after a default has occurred. The first step is to obtain independent legal advice from a solicitor who is not acting for the lender or the borrowing company. The solicitor should explain the terms of the guarantee in plain language, ensure you understand the extent of your potential liability, and advise on any amendments that could be negotiated to limit your exposure.

Consider whether your personal financial structure can be arranged to minimise exposure. For example, some developers hold their family home in the sole name of their spouse or partner, reducing the assets available to a lender pursuing a guarantee. This must be done well in advance of signing the guarantee — transferring assets after signing (or in anticipation of a default) can be challenged as a transaction at an undervalue or a transaction defrauding creditors under the Insolvency Act 1986, with serious consequences including criminal liability.

Insurance products that protect against personal guarantee liability do exist, although they are relatively niche and can be expensive. Personal guarantee insurance typically covers a specified percentage of the guarantee liability in the event of a default, with premiums of two to five percent of the insured amount per annum. The insurance does not prevent the guarantee from being called — it simply provides a source of funds to meet all or part of the demand. We can introduce developers to specialist insurance brokers who provide this product.

Finally, build your development appraisal with personal guarantee risk in mind. Ensure the project has sufficient profit margin to absorb cost overruns and market softening without creating a shortfall. A project with twenty percent profit on GDV can absorb a ten to fifteen percent cost overrun or value decline before the sale proceeds fall below the facility balance. A project with twelve percent profit margin has almost no buffer. The higher the profit margin, the less likely it is that your personal guarantee will ever be called. For guidance on appraising development viability, see our guide on how to calculate GDV.

Personal guarantees in joint venture (JV) development structures present unique challenges. Where two or more parties are developing a project together through an SPV, the lender will typically require personal guarantees from all parties with a significant equity stake. The critical question is how the guarantee liability is apportioned between the JV partners — and the answer depends on whether the guarantee is joint and several or several only.

In a joint and several guarantee, each guarantor is liable for the full guaranteed amount. This means that if one guarantor cannot pay, the lender can recover the entire amount from the other guarantor(s). In a 50/50 JV where both partners give a joint and several guarantee for £500,000, each partner is potentially liable for the full £500,000, not just their fifty percent share of £250,000. This is a significant risk that many JV partners fail to appreciate until a default occurs.

We always advise JV partners to negotiate several-only guarantees where possible, so that each guarantor is liable only for their proportionate share of the guarantee. If the lender insists on joint and several liability, the JV partners should enter into a counter-indemnity agreement between themselves, under which each partner agrees to reimburse the other for any payment made under the guarantee in excess of their proportionate share. This does not eliminate the risk (because the counter-indemnity is only as good as the indemnifying party's ability to pay), but it provides a contractual framework for apportioning liability.

The JV agreement should also address what happens if one partner wants to provide a larger or smaller guarantee than the other. In some cases, one partner may be willing to provide a larger guarantee in exchange for a larger share of the profits, or one partner may have limited personal assets and can only offer a smaller guarantee. These arrangements should be clearly documented in the JV agreement and reflected in the guarantee documentation. If you are considering a JV development, contact our deal room to discuss how we can help structure the finance and guarantee arrangements to protect all parties.