Alex is Sprintlaw’s co-founder and principal lawyer. Alex previously worked at a top-tier firm as a lawyer specialising in technology and media contracts, and founded a digital agency which he sold in 2015.
Contents
Being asked to “go guarantor” can feel like a big vote of confidence - but it’s also a serious legal commitment.
Whether you’re a director backing your company’s lease, a parent helping a child buy equipment for a new venture, or a supplier asking customers to provide extra security, it pays to understand exactly what guarantees involve in Australia.
In this guide, we’ll break down what a guarantor is, where guarantees are commonly used, what obligations and risks are involved, and the practical protections available to both guarantors and businesses. By the end, you’ll know the key clauses to look for, the documents usually required, and the smart steps to reduce risk on both sides.
What Is A Guarantor And How Do Guarantees Work?
A guarantor is a person or company who promises to satisfy someone else’s obligations if that person or company doesn’t pay or perform as agreed.
In practice, a guarantee sits alongside the main contract and says: if the borrower, tenant or customer (the “primary obligor”) defaults, the guarantor will step in to pay the debt or meet the obligations. This is why lenders and landlords often request guarantees for new or higher-risk arrangements.
Guarantees in Australia are typically documented as a deed or as part of a broader agreement. Because a deed has special legal formalities and enforceability, many businesses choose a dedicated Deed of Guarantee and Indemnity. If you’re wondering about the formality, it helps to understand what a deed is under Australian law and how it’s executed.
When Are Guarantees Commonly Used In Australian Business?
You’ll find guarantees across a range of commercial situations. The most common include:
- Business Loans and Credit Facilities: Lenders often require director or parent company guarantees for new or small businesses to reduce repayment risk.
- Commercial Leases: Landlords may insist on a director’s guarantee when leasing to a company with a short trading history or limited assets.
- Trade Credit Accounts: Suppliers extending credit to customers frequently request personal guarantees from directors alongside a General Security Agreement (GSA) over the company’s assets.
- Equipment or Vehicle Finance: Financiers may rely on a combination of guarantees and security interests registered on the PPSR.
- Construction and Services Contracts: Head contractors or principals sometimes seek guarantees for subcontractor performance or payment obligations.
As risk increases, counterparties often “layer” security - for example, combining a personal guarantee with a PPSR registration and, in some cases, a bank guarantee.
What Are A Guarantor’s Core Obligations (And Risks)?
Guarantees shift risk from the creditor to the guarantor if the primary obligor fails. It’s essential to understand what you’re taking on.
Payment And Performance If There’s A Default
The core promise is simple: if the debtor defaults, the guarantor must pay the outstanding amounts or perform the obligations. The guarantee will usually specify exactly what is covered - rent, outgoings, interest, break costs, legal expenses, and more.
“All Monies” And Continuing Guarantees
Many guarantees are “all monies” guarantees, meaning they cover all amounts owed now and in the future under the defined relationship. They may also be “continuing,” remaining in force until properly discharged, even if the underlying contract is varied or extended.
Indemnity Obligations
Guarantees frequently include an indemnity. While a guarantee ties your liability to the debtor’s default, an indemnity is a separate promise to make the creditor whole for loss - often broader, and sometimes enforceable even if the underlying obligation is defective. This is why Deed of Guarantee and Indemnity forms are common.
Joint And Several Liability
If there are multiple guarantors (for example, several directors), the document often makes each guarantor “jointly and severally” liable. Practically, the creditor can pursue one guarantor for the full amount, leaving the guarantors to sort out contributions between themselves.
Security Interests Over Assets
Some guarantees are combined with security interests, allowing the creditor to take or sell secured assets if there is a default. Creditors will typically register those interests on the Personal Property Securities Register (PPSR). If you’re the creditor, it’s prudent to both secure your position and register a security interest. To understand why this matters, it’s worth reading a short primer on the PPSR and why it matters for your business.
Risk Of Enforcement Action
If the debtor defaults and you don’t pay, the creditor can take enforcement action against you. This can include demands, litigation, enforcement against secured property, and adverse credit outcomes.
What Rights And Protections Do Guarantors Have?
Guarantees are serious, but guarantors aren’t without protections. Here are practical rights and safeguards to understand before you sign.
Disclosure And Understanding The Transaction
You should be given a reasonable opportunity to read and understand the documents, and to seek independent legal and financial advice. For consumer-related guarantees (e.g. where an individual is guaranteeing a consumer loan), there may be additional protections under consumer credit laws and general principles against unfair conduct.
Limits, Caps And Carve-Outs
It’s possible to negotiate the scope. Common limitations include:
- Liability caps: fixing a maximum amount (e.g. 3 months’ rent or a dollar cap).
- Time limits: ending the guarantee after an initial term or upon assignment with consent.
- Specific carve-outs: excluding consequential losses or certain costs, which can mirror limitations often seen in limitation of liability clauses.
Release On Assignment Or Exit
For leases and long-term contracts, you may be able to negotiate a release when the business is sold or the lease is assigned to a new tenant who meets criteria. A formal release is often documented in a settlement or assignment deed; businesses sometimes use a Deed of Release and Settlement to record agreed terms.
Subrogation And Contribution
If you pay under a guarantee, you can usually seek to recover from the debtor (subrogation). If there are multiple guarantors, you may also have rights of contribution - each guarantor shares the burden. These rights are subject to the terms of the guarantee and any security releases you sign, so it’s important to check how the document deals with them.
Termination And Revocation
In some cases - particularly for guarantees attached to ongoing supply - the guarantor can give notice to end liability for future transactions (not existing debts). Whether this is possible depends on the wording and the underlying commercial relationship.
Execution Formalities And Validity
Guarantees are often executed as deeds to ensure they’re binding even without traditional “consideration.” That means certain formalities apply, including witnessing and method of execution. You might see terms like “signed in counterpart,” which simply allows parties to sign separate but matching copies; our overview of signed in counterpart explains this in more detail. It’s also common to ask whether electronic execution is acceptable - in many cases it is, and this comparison of wet ink signatures vs electronic signatures clarifies the current position in Australia.
Key Clauses To Watch In A Guarantee (And Why They Matter)
Before you sign, scan for these clauses and check how they’re drafted. Small wording changes can dramatically change your risk.
- All monies and continuing liability: Does it extend to future amounts and variations? Is there a cap?
- Indemnity: Is there an indemnity separate from the guarantee? How broad is it?
- Security interests: Is the creditor taking security over your personal assets or shares?
- Costs and interest: Are you liable for legal costs on an indemnity basis and default interest?
- Demand mechanics: Does the creditor need to demand payment first from the debtor, or can they go straight to you?
- Joint and several liability: If there are multiple guarantors, can the creditor pursue any one guarantor for the full debt?
- Releases: Is there a process to be released on assignment or sale, and what are the conditions?
- Limitations and exclusions: Are consequential losses excluded? Are there liability caps?
- Governing law and jurisdiction: Which state’s law applies, and where can disputes be heard?
How Creditors Can Strengthen Their Position (Without Overreaching)
If you’re the business seeking a guarantee, your goal is to reduce non-payment risk while keeping terms fair and enforceable.
- Use the right document: A clear, tailored Deed of Guarantee and Indemnity avoids ambiguity and covers both payment and performance risk.
- Layer appropriate security: Combine a guarantee with a fit-for-purpose General Security Agreement or, for goods supplied, a purchase money security interest (PMSI), and remember to record it on the PPSR. If you’re new to the PPSR, start with this overview of what the PPSR is.
- Get execution right: Deeds have formalities. Ensure signatories and witnesses are correct and that the counterpart and e-signature mechanics are addressed.
- Keep terms proportionate: Caps, fair exclusions and clear triggers make enforcement cleaner and reduce the risk of disputes about overreach.
- Document variations: If the underlying contract changes (credit limit, term, rent), make sure the guarantee is drafted to survive variations or that you obtain a fresh confirmation.
Practical Steps Before You Sign Or Ask For A Guarantee
Here’s a practical roadmap for both guarantors and businesses.
If You’re Being Asked To Be A Guarantor
- Understand the deal: Get the main contract, the guarantee, and any security documents. Confirm whether the guarantee is “all monies” and if there’s an indemnity.
- Ask about limitations: Propose a cap, time limit or specific carve-outs that make sense for the risk.
- Consider security exposure: Check whether you’re granting a security interest and which assets are covered. If security is involved, expect PPSR registrations.
- Plan your exit: If you intend to sell the business or transfer the lease later, negotiate a clear release process now.
- Get advice: Independent legal and financial advice can clarify your exposure and help you negotiate fair terms.
If You’re Requesting A Guarantee From Someone Else
- Choose the right mix: Decide whether a guarantee alone is enough, or whether you also need a bank guarantee, PPSR security or both.
- Use clear drafting: Make sure your guarantee aligns with your credit policy, and consider professional clause drafting support for key risk areas like indemnities, caps and exclusions.
- Include proportionate limits: Fair caps and clear triggers encourage sign-off and reduce disputes later.
- Prepare for variations: Build in language so the guarantee continues to apply after reasonable contract changes.
- Think about releases: A transparent release process on assignment or sale builds trust and makes your offering more attractive.
FAQs About Guarantors In Australia
Is A Personal Guarantee The Same As An Indemnity?
No. A guarantee ties your liability to the debtor’s default; an indemnity is a separate promise to cover loss and can be broader. Many commercial forms include both. For a deeper look at risks, see this overview of personal guarantees in Australia.
Can A Guarantor Limit Their Liability?
Often, yes. Caps, time limits and exclusions can be negotiated. The final position depends on bargaining power and the commercial context.
What Happens If The Underlying Contract Changes?
Some guarantees continue despite variations; others may not. Well-drafted “continuing” guarantees aim to cover reasonable changes, but it’s best practice to confirm in writing when material terms are amended.
How Is A Guarantee Enforced?
If there’s a default, the creditor can issue a demand to the guarantor and, if unpaid, start enforcement (including litigation or enforcing any security). Many disputes focus on execution formalities, scope, and whether conditions for enforcement were met - clear drafting reduces these issues.
How Does A Guarantor Get Released?
Some guarantees end when the underlying obligations are fully paid. Others require a formal release, often via a deed on assignment or termination. If you’re settling a dispute or finalising an exit, the parties may sign a Deed of Release and Settlement to document the release.
Key Takeaways
- A guarantor promises to step in if the primary obligor doesn’t pay or perform - it’s a serious commitment with real enforcement risk.
- Guarantees are common in leases, loans and trade credit; they often sit alongside security like a GSA, PPSR registrations or a bank guarantee.
- Indemnity wording, “all monies” scope, liability caps, and joint and several clauses are the provisions that most affect your risk.
- Guarantors can often negotiate protections such as caps, time limits and release on assignment, and should get independent advice before signing.
- Businesses requesting guarantees should use clear, proportionate documents, register security where appropriate, and follow correct execution formalities.
- Using the right documents - from a Deed of Guarantee and Indemnity to PPSR security - helps manage risk and prevent disputes on both sides.
If you’d like a consultation on guarantor arrangements for your business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
