What is Surety?

A surety creates a triangular relationship between creditor, principal debtor and guarantor. The creditor (for example a landlord or supplier) gains extra certainty of payment. The principal debtor (your company) gains access to a contract or financing that would otherwise be unavailable. The guarantor assumes the risk if the principal debtor defaults.

The difference with a bank guarantee is fundamental. With a bank guarantee, the bank pays on first demand, regardless of whether the principal debtor is actually in default. With a surety, the guarantor can invoke the same defences as the principal debtor. The guarantor can also demand that the creditor first pursues the principal debtor before turning to the guarantor.

For private guarantors, additional protection applies. If a spouse or registered partner provides a surety without consent from the other partner, that partner can annul the surety. This does not apply if the surety was given in the ordinary course of business.

In practice, sureties are common in commercial leases where the landlord requires a personal guarantee from the director alongside the lease with the company. Supplier credit and construction contracts also frequently require sureties as additional security.

A surety can have enormous personal financial consequences. As a director who personally guarantees the lease of their business, you are personally liable for the full rent debt if the company goes bankrupt. Research by World Commerce and Contracting shows that 9.2 per cent of annual revenue is lost to poor contract management. That percentage can grow exponentially when sureties are not properly registered and an entrepreneur does not know what they have personally guaranteed.

Many entrepreneurs sign a surety at the start of a lease and then forget about it. The contract gets renewed, the rent increases, but the surety continues unchanged, meaning the risk grows without you realising it.