Employee Safety

In real estate and credit law, personal security refers to a form of security in which a natural or legal person is liable for another party’s debt with all of their assets. Unlike real security (e.g., land charge, mortgage), this liability is not limited to a specific property. The most common form of personal security in the real estate sector is the surety; other forms include joint liability, guarantees, and letters of comfort.

Surety as the Most Common Form of Personal Security

In a surety, the surety undertakes to the creditor (usually the bank) to assume responsibility for the debtor’s (borrower’s) obligation if the debtor fails to pay. In the real estate sector, suretyships are frequently used when the borrower alone does not have the creditworthiness required to finance a property. A distinction is made between a direct suretyship (where the bank can immediately seek recourse against the guarantor) and a subsidiary suretyship (where recourse is sought only after unsuccessful enforcement against the principal debtor). For the guarantor, this entails a significant financial risk.

Particularly with the direct guarantee, guarantors should understand that they have no protection through a prior claim: The bank can-as soon as the debtor defaults-directly seek recourse against the guarantor without first having to exhaust all available collateral from the debtor. In German banking practice, the direct guarantee is the standard almost without exception.

Personal Security vs. Real Security

Real security, such as land charges or mortgages, is tied to a specific asset and limits the guarantor’s liability risk to the value of that asset. Personal security extends to the guarantor’s entire personal assets-real estate, bank deposits, vehicles, and pension entitlements. In the case of combined financing, banks may require both real and personal collateral to minimize the overall risk.

In particular, when the purchase price of a property exceeds the loan-to-value ratio-for example, if the purchase price is significantly higher than the loan-to-value ratio determined by the bank-banks often require additional personal security. In such cases, a parent or another solvent third party then guarantees the portion of the financing not covered by the land charge.

Relevance in Real Estate Transaction Law

In the commercial real estate sector, personal guarantees are also used in lease agreements: Landlords require tenants with low equity or insufficient creditworthiness to provide a guarantee from a solvent third party (e.g., parents, parent company). In corporate transactions (share deals), guarantees often secure outstanding purchase price claims or warranty obligations.

In commercial leasing in Nuremberg, bank guarantees are commonly used as rent security: Instead of a cash deposit, the tenant provides a bank guarantee that the landlord can cash in at the bank in the event of a claim. This form is gentle on the tenant’s liquidity and secure for the landlord-provided the guarantor bank has a strong credit rating.

Practical Tip for Property Owners in Nuremberg and Franconia

Anyone financing a property in Nuremberg or the metropolitan region and acting as a guarantor for family members should be fully aware of the risks. A directly enforceable guarantee against a bank should not be underestimated: in the event of default, the guarantor is liable without limit. We strongly recommend consulting a financial advisor or attorney before signing a guarantee. We would be happy to put you in touch.

For commercial landlords in Nuremberg who require guarantees as rental security, we recommend having the guarantee reviewed for the creditworthiness of the guarantor bank and for formal validity before the contract is concluded. A flawed guarantee is worthless in the event of a claim.

Frequently Asked Questions

Can I revoke a guarantee?

Once a guarantee has been assumed, it generally cannot be unilaterally revoked as long as the secured obligation remains outstanding. Exceptions apply in cases of fraudulent misrepresentation or contracts contrary to public policy. A guarantee automatically expires when the secured debt is fully paid off.

What happens in the event of the principal debtor’s personal bankruptcy?

If the principal debtor becomes insolvent, the creditor can hold the guarantor directly liable-immediately in the case of a direct guarantee, and only after unsuccessful enforcement in the case of a subsidiary guarantee. The guarantor then has a right of recourse against the insolvent debtor, though this is usually worthless in insolvency proceedings.

Does it make sense for parents to provide a guarantee for their children’s real estate purchase?

This can be one way to improve financing options. It is important that the parents fully understand the scope of their liability and that the guarantee is provided in writing; in the case of a bank guarantee, it must be notarized or at least in writing with a notarized signature. Open communication and legal advice are essential.

How does a guarantee differ from joint liability?

In the case of joint liability, the third party joins the obligation as a joint and several principal debtor-they are then liable on an equal footing with the original debtor, not merely subsidiarily. The bank can therefore hold both parties liable simultaneously. Joint liability is legally even more burdensome for the guarantor than a direct guarantee and should only be agreed upon after thorough consultation.

Letters of Support and Guarantees as Additional Forms

In addition to guarantees, there are other forms of personal security in the commercial real estate sector that are playing an increasingly significant role in practice. The letter of support is frequently issued by parent companies: The parent company declares that it will provide the subsidiary with financial resources so that it can meet its obligations-e.g., under a commercial lease or a project financing loan. A hard letter of comfort establishes a genuine, legally binding obligation; a soft letter of comfort, on the other hand, is merely declaratory in nature and offers the creditor little reliable protection.

The guarantee (Section 765 BGB by analogy, but often drafted independently) differs from a suretyship in that it is abstract: The guarantor is liable regardless of whether the secured debt actually exists and whether the principal debtor has any defenses. Bank guarantees-such as the first-demand guarantee-are widely used in the commercial real estate sector and are particularly secure for the beneficiary because the bank must pay upon first demand without being able to invoke any defenses raised by the principal debtor.

For landlords in Nuremberg who lease large commercial spaces to small and medium-sized enterprises, the choice between a bank guarantee, a security deposit, and a letter of comfort is a strategic decision that depends on the tenant’s creditworthiness, the term of the lease, and the size of the leased space. We assist property owners in structuring suitable security packages for their lease agreements.

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