Letter of Guarantee

Guarantee Agreement - A guarantee agreement is a written commitment by a third party (the guarantor) to be liable for the obligations of a principal debtor. In the real estate sector, guarantees are used as rental deposits, to secure construction loans, as performance bonds in construction contracts, or as security for development costs. According to Section 766 of the German Civil Code (BGB), the guarantee declaration must be in written form - oral guarantees are invalid.

Types of Guarantees in the Real Estate Sector

• Direct Guarantee: The guarantor waives the defense of prior action - the creditor can turn directly to the guarantor without first suing the principal debtor. The standard form in business transactions.
• Default guarantee: The guarantor is liable only if the creditor proves that enforcement proceedings against the principal debtor were unsuccessful.
• Guarantee on first demand: The guarantor must pay immediately upon demand, without being able to verify the validity of the claim. Very broad in scope; often invalid in standard terms and conditions vis-à-vis consumers.
• Rental guarantee: Parents or third parties guarantee the rental obligations-limited to a maximum of three months’ rent in addition to the cash deposit or in lieu thereof.

Formal requirements

The guarantee declaration must be issued in writing pursuant to § 766 BGB-the guarantor’s handwritten signature is mandatory. An electronic form (email, digital signature) is not sufficient. The declaration must specify the principal debtor, the creditor, the secured claim, and the scope of the guarantee (limited or unlimited in amount).

Special protective provisions apply to guarantees provided by private individuals: According to the case law of the Federal Court of Justice (BGH), a guarantee that places an excessive financial burden on the guarantor may be contrary to public policy and thus void-particularly in the case of guarantees provided by family members without their own income.

Bank Guarantee as an Alternative to a Cash Security Deposit

A particularly practical form in tenancy law is the bank guarantee: Instead of a cash security deposit, the tenant provides a guarantee certificate from a bank, which will pay up to a certain amount at the landlord’s request. The advantage for the tenant: Their own capital remains available. The advantage for the landlord: The bank, as the guarantor, has a stronger credit rating than a private guarantor. The costs for a bank guarantee amount to approximately 0.5-2% of the guarantee amount per year-for three months’ rent in Nuremberg, this typically amounts to 30-120 euros annually.

Types of Guarantees in the Real Estate Sector - Overview

Type of Guarantee	Scope of Application	Scope of Liability	Special Feature
Direct Guarantee	Rental deposit, construction contract	Direct enforcement possible	Standard in business transactions
Default Guarantee	Supplementary security	Only after unsuccessful enforcement	Most favorable form for guarantors
First-demand guarantee	Construction projects, commercial lease law	Immediate payment without objection	Often invalid in standard terms and conditions vis-à-vis consumers
Rental guarantee (private)	Residential lease agreement	Max. 3 months’ base rent (§ 551 BGB)	Parental guarantee common
Bank guarantee	Rental deposit, construction contract	Up to the guarantee amount	Annual costs 0.5-2% p.a.
Completion guarantee	Property development contract	Up to the security amount (Section 650m BGB)	Buyer protection in case of developer insolvency

Practical Tip for Property Owners in Nuremberg and Franconia

We recommend that landlords in the Nuremberg metropolitan region insist on a directly enforceable guarantee waiving the defense of prior action when accepting a rental guarantee, and limit the guarantee amount to three months’ base rent (§ 551 BGB). Please note: If the tenant also provides a cash security deposit, the total security (cash deposit plus guarantee) may not exceed three months’ base rent. A guarantee exceeding this amount is only valid if the guarantor offers it voluntarily and without being requested to do so by the landlord. In practice, we recommend checking guarantees for their validity-older guarantee documents may contain weaknesses that could be exploited in the event of a dispute.

Frequently Asked Questions

Can parents act as guarantors for their children’s rent?

Yes, parental guarantees are common in tenancy law and legally permissible. However, please note: If the tenant has already paid a cash security deposit equal to three months’ rent, the landlord may not demand an additional guarantee. However, a parental guarantee offered voluntarily that exceeds the three-month limit is valid. Parents should check before signing whether their own financial situation allows for such liability-an unreasonably onerous burden may render the guarantee void.

How does a guarantee end?

A guarantee ends upon the extinction of the principal debt (repayment of the loan, termination of the lease), upon termination by the guarantor (for indefinite guarantees with reasonable notice), upon the expiration of the term (for fixed-term guarantees), or upon release by the creditor. The guarantor should obtain written confirmation of the return or cancellation of the guarantee document. In the case of a rental guarantee, liability generally ends upon termination of the lease and full settlement-the landlord must then return the guarantee promptly.

Is the guarantor also liable for interest and incidental claims?

In principle, yes-according to Section 767 of the German Civil Code (BGB), the guarantee extends to the principal claim, including interest, contractual penalties, and legal costs. However, in the case of a guarantee limited to a specific amount, the guarantor is liable only up to the stated maximum amount, even if the principal claim exceeds this amount. Anyone who signs a guarantee with a specific maximum amount thereby has a predictable liability cap-this is significantly more favorable for private individuals than an unlimited guarantee.

What special requirements apply to the completion guarantee in a real estate development contract?

The completion guarantee under Section 650m of the German Civil Code (BGB) protects the buyer of a new-construction apartment from the risk of the developer’s insolvency. The developer must provide the buyer with either a completion guarantee in the amount of five percent of the purchase price or security via a notary escrow account mechanism. In practice, a bank guarantee for the security amount is usually issued. This guarantee gives the buyer the option, in the event of insolvency, to draw down the secured amount from the bank and thereby finance completion by another contractor or the rescission of the contract. Buyers in the Nuremberg metropolitan region should insist, when concluding a property development contract, that the security agreement and the guarantee document be available before the first installment payment is made. If the security is missing, the developer is obligated to refund the installments. We recommend having property development contracts reviewed by an experienced attorney specializing in construction and architectural law before signing.

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