Understanding your liabilities when taking up a new lease

Legal

MY last article in this series takes a look at deposits and guarantees. If you are taking-up a new lease, the landlord’s agents will be asking you to provide financial and other references to check your financial strength.

Typically, these will be bank, credit, trade references and of your previous or existing landlord (if any), together with accounting information for the last two or three years.  Depending on the strength of these, you may be asked to provide a deposit and/or guarantee, particularly if you are starting a new venture or are a relatively new limited company. Typically, you as a director and shareholder may be asked to provide a personal guarantee.

What does this mean? It is likely to be unlimited as to its amount and you will be underwriting the rent, insurance rent, service charge and all other sums that may be due under the lease. This includes the cost of putting the premises into repair if that has not been done!

A guarantee is an expensive obligation and whilst it does not amount to a charge against your home, your default could lead to judgement following which a charging order against your home can be obtained. Therefore, beware! 

The alternative of a deposit may be more expensive. Typically six months’ rent. Again and as above, this doesn’t just cover rent. However, at least it will be a fixed liability.  All being well, it will be returned to you when the term of your lease ends.

Did you know that you can expect to have to give your landlord a guarantee if you transfer your lease to a third party? In addition to your landlord asking the third party for a deposit and/or guarantee, your landlord can rely upon you as the outgoing tenant to provide it with a guarantee that the ingoing tenant will observe and perform the covenants and conditions of the lease. It is not quite as bad as the position before 1 January 1996.  The law at that time provided that the original tenant would be liable to the landlord throughout the lease term! A change in the law abolished this, albeit that you will still remain liable until your ingoing tenant transfers the Lease again.  You may wish to think about security being provided by your ingoing tenant to you for such liability. Another guarantee!

Touching briefly and lastly on alterations and changes of use, please ask your landlord or its agents about this, particularly with a change of use that you need to be able to operate from the premises. You may be willing to enter an agreement to take-up the Lease as soon as you have obtained planning permission to secure the deal.

Good luck with your lease negotiations!  If you would like further advice, do please get in touch.