Table of Contents
In Short
- A guarantor ensures a tenant’s lease obligations are met, providing landlords with additional security.
- Landlords may request a guarantor if the tenant is a start-up, has limited trading history, or exhibits poor financial strength.
- It is crucial to include provisions in the lease that bind the guarantor to any future variations to maintain enforceability.
Tips for Businesses
When acting as a guarantor, understand the extent of your obligations, especially concerning potential lease variations. Landlords should ensure lease agreements clearly outline the guarantor’s responsibilities and consider including clauses that cover future changes. Both parties should seek legal advice to ensure the guarantee is enforceable and aligns with their interests.
When you select a business tenant, you take on a risk that they may need to fulfil their obligations in the lease. Therefore, you may request a guarantor for your commercial lease to protect you from this risk. This article will explain why you, as a commercial landlord, may request a guarantor for your UK commercial lease.
What Are Guarantors?
When your commercial tenant signs your commercial lease agreement, they sign a legal contract. Hence, you both make a binding agreement to honour the obligations and rights set out in it. A guarantor is a third party who may sign your lease agreement upon your request. Their role is to guarantee that your commercial tenant carries out their lease obligations. Otherwise, the guarantor promises to fulfil the covenants on their behalf.
Why Request a Guarantor?
As a commercial landlord, you may request that your commercial tenant offer a guarantor for the commercial lease agreement as long as it is reasonable and legal. You can ask this at the start of the commercial lease before they sign the lease agreement.
You may request a guarantor for your commercial lease agreement to provide additional security to protect your commercial investment.
Therefore, you may always request a guarantor for all your commercial tenants, but you might decide on a case-by-case basis. Typical reasons you may request a guarantor are, for example, where your commercial tenant:
- is a start-up company;
- has little trading history;
- demonstrates ‘poor covenant strength’; or
- because the lease is extended as your tenant pays over the years.
You will also need to consider the business your tenant runs from the commercial premises, as it may not progress as they would like it to. This could happen where:
- a recession occurs;
- the business fails;
- there is a cost of living crisis; or
- a pandemic such as COVID-19 breaks out.
If you request a guarantor for your commercial lease, you can decide what responsibilities they will guarantee for your tenant, and the lease will stipulate this. You may limit what they guarantee and provide a break clause in the lease agreement where your tenant can end the lease early.
What is an Authorised Guarantee Agreement?
In addition to requesting a guarantor for your commercial lease agreement at the start of the commercial lease, you can also request that your tenant becomes a guarantor for the new tenant as a condition for your agreement to assign their lease. This is an Authorised Guarantee Agreement (‘AGA’). Therefore, your current tenant knows that if the new tenant does not fulfil their lease obligations, they will do so for them. When you request an AGA, you can also request a guarantor for the lease agreement from the new tenant at the beginning of their lease.
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What Does a Guarantor Provide?
Typically, a guarantor will guarantee all your tenant’s lease obligations. They will generally do this by signing the commercial agreement at the start of the lease. However, it is essential to note that they guarantee your tenant’s lease obligations as they stand there and then. Therefore, if these vary as the lease progresses, their guarantee may not cover any variations or new obligations.
It is essential, therefore, to consider when you request a commercial lease guarantor whether you:
- wish to include a lease agreement provision that binds the guarantor to any lease obligation variations; or
- think about varying the guarantee obligation when you can change or add obligations to cover these.
When considering the second option, you must consider whether the guarantor must approve these changes. If you do not consider the situation where lease obligations vary, the guarantee may be unenforceable.
5 Points to Be Aware Of When Seeking a Guarantor
1. Providing a Guarantor at the Start of the Lease
You should note that if you ask your commercial tenant to provide a guarantor at the start of the lease agreement, they guarantee your commercial tenant’s lease obligations as detailed there and then. This means that if you vary the obligations to a later date unless they agree, they will no longer be a guarantor for all your tenant’s commercial lease obligations. However, you can protect against this by ensuring the lease agreement allows for future variations that do not require you to consult with the lease guarantor.
2. Meeting Lease Obligations
If your commercial tenant has not met a lease obligation and you demand they do, where they continue not to, you do not then have to make any additional legal demands from the guarantor. However, naturally, you must explain the situation to them and practically request they meet it.
3. Becoming a Personal Guarantor
When you request a guarantor at the start of the lease agreement, you may specify that the commercial tenant, as the company director of the business, provides themselves as a personal guarantor for the company’s obligations in the commercial lease.
4. Disclaimers
Say your commercial tenant becomes insolvent. In this instance, the liquidator or trustee in charge of the insolvency may disclaim the lease. Lease obligations, therefore, no longer bind your tenant.
Where a disclaimer occurs, you must ensure that it does not affect the guarantor’s obligations to carry out the lease provisions that the tenant was previously bound to. You can do this by ensuring the lease agreement has a provision stating your remedy options should you receive a disclaimer notice from your tenant. It may state, for example, that the guarantor must:
- provide a liquidated sum of the amount of rent due from the date the disclaimer notice has effect until the lease end date; or
- take on a new commercial lease with the duration from the point that the disclaimer takes effect until the original lease end date.
The first option will end the guarantor’s lease obligations. Regardless of which option you take, you will often have to give the guarantor notice within a specific timeframe.
5. Enforcing the Guarantee
You should also consider the guarantor’s ability to guarantee the lease. More specifically, you should consider:
- realistic notice periods in the lease agreement to require the guarantor to carry out the lease obligations, as you will need to comply with these to make lease obligations enforceable; and
- when you force the guarantor to carry out lease obligations, the guarantor may assume other rights in the commercial lease.
This cheat sheet outlines what you should be aware of in your lease agreement.
Key Takeaways
When you lease your commercial property to a business, you may wish to provide security by ensuring your tenant provides a guarantor for their lease obligations. This means that if your tenant fails to meet particular obligations, your landlord is obliged to fulfil them in this instance. Further, you may request a guarantor for your lease where:
- your tenant runs a start-up company; or
- they demonstrate poor covenant strength.
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 for a low monthly fee. So call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
Guarantors should understand the extent of their obligations, including liability for future lease variations. Seeking legal advice is crucial to comprehend and manage the risks involved fully.
A landlord may request a guarantor if the tenant is a start-up, has limited trading history or demonstrates poor financial strength, providing additional security for lease obligations.
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