BEFORE a landlord grants a lease to a tenant, they may require that a guarantor is provided writes Mohammed Rahman, partner at Borneo Martell Turner Coulston Solicitors in Northampton.
A guarantor may represent the security, comfort and assurance for a landlord, however it also means obligations, risk and liability for a guarantor. A guarantee should never be entered into lightly and there may be significant financial consequences for the guarantor if a guarantee is enforced.
Under lease guarantee clauses, a guarantor will usually agree to all of the obligations which the tenant has to comply with under the lease. In the event, that the tenant does not comply with the obligations under the lease, then the responsibility will fall to the guarantor. Therefore, a guarantor will have a lot of responsibility and potential liability in relation to the lease.
Obligations under the lease do not just relate to payment of rent during the lease term but they can include making good any damage to the premises, payment for any loss suffered by the landlord in relation to any enforcement action carried out by the landlord, payment of any service charge, if applicable, under the lease etc.
If asked to act as a guarantor, it may be worth considering the following before agreeing to become a guarantor:
Offer a rent deposit
A rent deposit would provide the landlord with security that the rent will be received. Usually a tenant would be required to provide a three-month or six-month rent deposit. This may be deemed to be enough security for the landlord and negate the need for a guarantor.
Limit your guarantee
In the event a landlord insists on having a personal guarantee, seek to limit the term of the guarantee to a number of years rather than for the whole of the term of the lease. Alternatively or in addition to the time limit, you could seek to cap your liability to a fixed amount. This would mean that as a guarantor you can plan and calculate what your maximum liability would be.
Understand what you are guaranteeing
It is extremely important, if you are asked to be a guarantor, that you obtain legal advice and ensure that the lease terms are reviewed in full by a legal advisor and that you are made fully aware of what your obligations would be.
It is important to remember that there is no such thing as a “standard lease” therefore although guarantee agreements may be similar, each individual lease may have specific obligations which you may be required to comply with.
Check the tenant’s status
Before entering into any guarantee, you should check what the tenant’s financial status is and what their business plan is. While it is very easy to offer to help a friend or family member, you must understand that if the tenant is not of a good financial standing, the likelihood of the guarantee being enforced is greater.
Separate agreement with the tenant
If you are asked to be a guarantor for an independent tenant – for example, not as a director of a tenant company – you may wish to enter into a separate agreement with the tenant to ensure you have some form of security.
Any agreement you enter into should include a security from the tenant in your favour with a view to allow you to take action against the tenant in the event the guarantee is enforced by the landlord.
For further information or advice in respect of the above or any commercial property transaction, contact Mohammed Rahman at Borneo Martell Turner Coulston Solicitors, email or call 01604 622101.