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A commercial lease agreement governs your commercial lease. It is a legally binding contract which details your rights and obligations under the lease agreement. This will include, for example, your rent amount and any repair obligations. Whilst you are party to the lease agreement, your landlord may also request a guarantor for your commercial lease. This article will explain why you, as a commercial tenant, may need a guarantor for your UK commercial lease.
What is a Guarantor?
As a commercial tenant, you must fulfil the commercial lease obligations when you sign a commercial lease agreement. A guarantor is a third party who promises to complete the lease obligations should you not meet them or be liable for that breach in addition to the liability you have. For example, this includes the directors of the corporate tenant, another company, or perhaps, certain involved shareholders of the tenant.
If your commercial lease requires a guarantor, you must understand what obligations you are to carry out as part of the agreement. It is also essential to know if the request for a guarantor is reasonable and legal. Therefore, where your commercial lease requires a guarantor, it is helpful to take legal advice from a commercial property solicitor.
Guarantors in Commercial Leases
Where a landlord requests a guarantor in a commercial lease, it is usually to guarantee all covenants of the lease agreement. Often, it contains a blanket indemnity for any loss or liability the landlord suffers because of the tenant’s conduct. This means that the guarantor promises the landlord that it will be responsible for that loss or liability.
A landlord can request a guarantor when you sign the commercial lease. A guarantor guarantees your lease obligations when you sign the commercial lease and provides your landlord with security. Furthermore, a guarantor can also protect your landlord should your company become insolvent.
A commercial lease will likely request a guarantor for you as the commercial tenant where you are a start-up company with little trading history or ‘poor covenant strength’. The latter is where specific reasons cause your commercial landlord concern that you will not be able to carry out all your lease agreement obligations, usually focusing on the ability to make long-term payments.
Where you breach a lease covenant, your landlord has the right to demand that your guarantor meet it. Therefore, your guarantor may have to pay your rent or do the repairs you fail to do. If your guarantor is an individual, they will meet the obligations or payments personally. Moreover, they put their personal assets at risk.
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Authorised Guarantee Agreement
There is also a further instance when a commercial landlord can request a guarantor for a commercial lease. This is where they request you give an Authorised Guarantee Agreement (AGA). This agreement refers to where you wish to assign your lease to a new tenant. To assign your lease is to pass all rights and obligations to another person who must fulfil these. This generally means you no longer have any rights or obligations in the commercial premises.
When you wish to assign your lease to a new tenant, your lease agreement likely states that you need the permission of your commercial landlord. When you request this, your landlord may ask for an AGA. This means that you become a guarantor for the new tenant. Therefore, you guarantee that they will fulfil their lease obligations if they cannot fulfil them.
Key Takeaways
When you rent commercial premises as a commercial tenant, you may need to provide a guarantor before you can sign and start the lease agreement. A guarantor promises to fulfil your lease obligations should you fail to. Indeed, your landlord may request a guarantor for their security, such as if your company becomes insolvent. They are likely to request one where, for instance, your company has a little trading history. Further, they can also require that you act as a guarantor if you wish to assign your lease to another tenant. When your landlord requests this, you must get legal advice to ensure their demand is reasonable and legal.
If you need help understanding guarantors in commercial leases in the UK, LegalVision’s experienced leasing lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. So call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
A commercial lease is where a business owner occupies a landlord’s property as their commercial premises in return for rent.
A guarantor is a third party to a legal agreement which promises that if the tenant fails to fulfil particular obligations in the lease agreement, they will do so for them.
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