Property guarantees - taking more than a pound of flesh?

Many directors and owners of companies will have been asked, at some point, to provide a guarantee for their company to a potential landlord.  This is particularly the case for new or small companies, but has become increasingly prevalent with some high profile ‘household name’ tenant failures. 

Before agreeing to guarantee, it is important to consider the potential personal liabilities that might be incurred and to look at other ways of providing security to a landlord.

Most company owners will have set up their company with limited liability because they didn’t want to assume personal risk or liability; by giving a guarantee, that protection can be eroded. Standard guarantee clauses in leases will require the person standing as guarantor not only to make good any losses suffered by the landlord if the tenant fails to pay rent or observe its other tenant covenants - the most obvious and onerous ones being the obligation to repair the property, comply with statutes and pay insurance rent and/or service charge – but also to take a new lease direct from the landlord if either the lease is forfeited or is disclaimed by a liquidator. That new lease would be on the same terms as the original and for the length of term remaining. As such, the guarantee could be very onerous indeed. Many leases will also provide that the landlord can choose to make the guarantor pay rent for the property until it is re-let instead of taking a new lease.

In recent years, however, landlords have taken the view that if the company tenant is in difficulty, it is likely that the person standing behind it will also be struggling, and so they ask for a rent deposit or a bank guarantee – sometimes in addition to a personal guarantee, or sometimes instead of it. That gives the landlord a pot of money he can access quickly and easily in the event of tenant default.  It may not cover all losses suffered by the landlord, but it should go a long way towards doing so. Supplying the rent deposit will be a cash flow issue for the tenant company, but provided it doesn’t default under the lease, it should earn interest on the deposit

If the company wants to take over an existing lease – which may well allow the landlord to require a guarantor on any lease assignment - it may be preferable to take an underlease from the existing tenant because the landlord may have fewer controls and less ability to insist on a guarantor. Every transaction, however, will depend on the precise terms of the relevant lease.

One final point to remember is that many leases say that if a guarantor dies, is declared bankrupt or goes into liquidation, the tenant must notify the landlord and provide an alternative guarantor. If that obligation is not met, the landlord has a right to forfeit the lease. For small and medium size businesses there may be no one else prepared to stand as guarantor, in which case this type of clause would cause real difficulty. This is just one of the areas upon which we would advise and look to amend during negotiation.

David Rayner
01245 453826
[email protected]