Real Estate Finance Case Law: Personal Guarantees

Charles Bezzant, partner, and Aselle Djumabaeva-Wood, associate at Hemlins, consider recent trends in relation to real estate finance case law and what might be on the horizon.

What have been the key cases in this area over the past 12 months?

There have been quite a few cases in relation to the recovery under personal guarantees given in relation to the borrowing from banks and private lenders but only a couple of those cases are in the context of real estate finance.

What themes are developing in this area?

This type of case is not uncommon after a recession, and the cases have inevitably taken some time to reach the courts. During difficult economic times, in relation to loans when full recoveries from borrowers have not been possible because of the fall in value of the properties, lenders have been faced with seeking to make good shortfalls in recovery from personal guarantees. This time around, the courts appear to have largely found in favour of the lenders. In fact, lenders have often been looking to seek summary judgment to enforce the guarantees.

The most interesting cases in this area have come about when summary judgment has been granted by a court, and guarantors have sought to challenge it by presenting evidence that there might have been a misrepresentation on the lender’s part to induce the guarantor to enter into the guarantee, and/or that the guarantor only entered into the guarantee as a result of duress.

For example:

Bank of Ireland (UK) plc v Jones and another [2014] NIQBD 93

A default judgment given in favour of the bank was set aside because the guarantors contended that they gave personal guarantees on the basis of their understanding that their liability under those guarantees was limited. It was held that the court should determine the issues raised by the guarantors at a full hearing.

Bank Leumi (UK) plc v Akrill [2014] EWCA Civ 907, [2014] All ER (D) 192 (Jul)

A summary judgment given in favour of the bank was set aside and the case was returned to the High Court for consideration because the guarantor raised a defence of misrepresentation that was allegedly made by the bank as to the circumstances and the extent of the bank’s intention to seek recovery under the guarantees.

It remains to be seen how these cases will be determined on the proper examination of the evidence, but these two cases show that guarantors have been able to challenge, if not the enforceability of the guarantees, then certainly the lenders’ ability to obtain summary judgment in respect of them.

How have these cases changed lawyers’ approach in this area?

Advisers to guarantors are perhaps even more often seen to be exploring any avenues to enable their clients to challenge enforcement of guarantees.

Following the decision in the case of Royal Bank of Scotland plc v Etridge (No 2) [2001] UKHL 44, [2001] 4 All ER 449 some 14 years ago, in order to protect the lenders from potential allegations of duress, lenders’ advisers have been insistent on guarantors procuring independent legal advice and having their signatures witnessed by these independent lawyers.

In order to deal with this relatively new wave of potential misrepresentation issues, a usual standard form of the guarantee document contains an express exclusion of any representations and warranties which are not incorporated in the signed guarantee. A prudent adviser to a guarantor insists on any variations to the guarantee (or any waivers or promises in relation to their enforcement) to be recorded in a side letter signed by the lender if the lender does not agree to vary the wording of the guarantee.

We recommend that the same practices are adopted by the lenders too so that—should they ever need to—they would be able to show that, if any variations or promises have been made in relation to the enforceability of the security documents in general, and of guarantees in particular, it is their customary practice to record those. This being the case, if in relation to a particular loan nothing has been recorded, then this might be used as evidence to support the lender’s position that no variations were agreed.

What are the most important cases in this area on the horizon?

We will have to wait to see how the above cases are determined on their facts. Watch this space.