It is common for landlords to require a guarantor for a lease, whether the tenant is an individual or a limited company. A landlord is always looking to ensure that they have a fallback position in the event that the tenant stops paying rent, becomes unable to pay, or breaches any of the tenant covenants in the lease.
Often, the guarantor is related to the proposed tenant. Perhaps it is a limited company taking the lease, and the directors are giving a personal guarantee. Alternatively, it is common for a tenant to be a limited company, with the parent company or another company within the group structure providing the guarantee. Being a guarantor is a very important consideration because it is a legal commitment to pay the rent or meet other lease obligations in the event that the tenant fails to do so.
When should you pursue guarantor enforcement?
A landlord is likely to be keen to pursue a guarantor if the tenant ceases to pay rent, is unable to do so, or commits another serious breach of the tenant covenants in the lease. A landlord might have no recourse to a rent deposit and therefore have no option but to pursue a guarantor to ensure that they continue to receive rental income or are paid a sum of money that is due for breach of one of the tenant covenants in the lease, such as disrepair.
If the tenant ceases to pay rent and a landlord is looking for a guarantor to step in and pay the rent, very quickly, consideration needs to be given to section 17 of the Landlord and Tenant (Covenants) Act 1995 and the need to serve a notice on a guarantor within 6 months of any sums falling due. Whether notice needs to be served on the guarantor depends on whether they are a guarantor to the current tenant or former tenant.
Under the guarantor liability scope, what can you claim?
This depends on the wording in the guarantee included in the lease. It is common for guarantors to agree to effectively step in and adhere to all tenant obligations in the lease, whether it is to pay rent or abide by other tenant covenants, if the tenant becomes unable to pay.
What are the differences between authorised guarantee agreements and original tenant liability?
When a tenant signs a lease at the time it is granted, they become the first tenant under that lease, and therefore the original tenant. If they later transfer their interest to a new tenant, the new tenant will not be the original tenant; they will be called an assignee.
An authorised guarantee agreement is an agreement where an outgoing tenant guarantees that the party to whom it is transferring its lease will abide by the tenant covenants.
It is common for landlords to require any tenant (whether they are the original tenant or not) to enter into an AGA if they are transferring their tenant interest to a new tenant. A landlord wants to know that if the new tenant doesn’t pay, they can look to the previous tenant to step in and pay.
What is the guarantor enforcement process?
Care should always be taken to read the lease properly to understand the steps to follow if the tenant defaults on one of the lease covenants. In many instances, a landlord may want to alert a guarantor as early as possible that there has been an act of tenant default and invite the guarantor to step in and remedy the breach.
As mentioned above, legal advice should also be sought in relation to whether or not a section 17 notice needs to be served under the Landlord and Tenant (Covenants) Act 1995 and the answer to this does depend on whether it is the current tenant that is defaulting under the lease terms and whether the tenant’s guarantor needs to be consulted or whether in fact it is a former guarantor or a previous tenant that needs to be consulted.
In some cases, for example, if a tenant goes into liquidation and the liquidator disclaims the lease, the lease document includes provisions requiring the landlord to notify the guarantor within a specific time period that the guarantor must assume the lease. The precise terms of the lease will prevail here and ought to be consulted in each instance.
Assuming the tenant defaults and does not pay rent, a demand should be made as early as possible to the guarantor, so they can make good the breach.
What are the requirements and service procedures?
Again, this depends on the terms of the lease and what they prescribe. A landlord needs to ensure that when the lease is being drafted or when the guarantee is given, contact details for the guarantor are shared, allowing the landlord always to contact the guarantor. What you don’t want is a situation where a guarantee is given many years ago, and when the landlord needs to enforce it, they have no live and up-to-date contact details for the guarantor.
From the landlord’s perspective, they should ensure they always have an email and residential address for the guarantor to maintain a line of contact. As a belt and braces approach, a landlord should put a priority alert on the address given for the guarantor so that they are alerted if the guarantor tries to sell that property and relocate.
What are possible guarantor defences and counterarguments?
Giving a guarantee is a very serious matter, and ideally, a guarantor should always take legal advice to understand the obligations that they are taking on.
Guarantors are given a certain level of protection because they are only guaranteeing the lease terms at the time they provide the guarantee. If these lease terms change in any way, the guarantee might become void. For example, if a tenant agrees terms with a landlord to undertake alterations to the building or for example they agree to take over and rent more of the premises than the lease originally referred to, then unless the guarantor is included on those negotiations and any formal legal documents, the guarantor might be able to argue that their guarantee does not extend to these altered lease terms.
A guarantor can also argue that the guarantee is invalid or unenforceable, but these defences would be very difficult to succeed with if, in fact, they have taken legal advice at the time they are entering into the guarantee. The same comments apply in relation to potential arguments regarding undue influence or duress, misrepresentation, lack of capacity or unfair contract terms.
A landlord must ensure the guarantee is executed correctly and signed by the guarantor to avoid any arguments later that it is ineffective.
Can you start court proceedings against guarantors?
Theoretically, the answer to this is yes. A formal letter of claim must be sent to the guarantor before the court proceedings are issued, outlining the basis of the claim against them.
Does multiple guarantors mean you have joint and several liability?
The answer to this depends on the wording of the particular document, but generally, the answer is yes. If you have several parties who are guarantors, then it is usual for the deed or document to provide that they have joint and several liability. This means that the landlord has the option of pursuing one or all of the guarantors at any one time.
The conditions will depend on the wording of the particular lease or document and whether or not the lease continues or is terminated. In some limited circumstances, if the lease terminates, then the guarantor may be released from the liability. If that is not the case, then a guarantor may find that they have to pay under the guarantee until the lease comes to its contractual end.
What are the rules of cost recovery interest claims?
It is common for leases to provide that a tenant, and therefore impliedly a guarantor if the guarantee is called upon, has to pay the landlord's legal costs on an indemnity basis. It is also common for leases to include a provision for interest to be paid on any sums due under the lease.
If the tenant and guarantor are obliged to pay the landlord indemnity costs, this generally means all of the costs that the landlord incurs. If the lease does not contain an indemnity cost provision, it simply requires the tenant or guarantor to pay reasonable costs. In such cases, the landlord could not expect to recover all of their costs and would usually only recover a reasonable proportion.
This information is for guidance purposes only and does not constitute legal advice. We recommend you seek legal advice before acting on any information given.
