ACTING AS A GUARANTOR

You’ve found your premises, decided to enter into a lease and want it in your company name.    Your future landlord is willing to enter into lease negotiations with you but you’re a start-up company with a limited trading history and financial record and he wants to ensure compliance with lease obligations and protect himself against a breach so, what happens next?

 

In such circumstances a landlord will more than likely want a third-party guarantee and often, where the company is limited, one or more of the company directors will be called upon to give it.

 

What is a guarantee?    It is a promise to ensure that a third party fulfils its obligations and/or a promise to fulfil those obligations if that third party fails to do so. It is a contractual agreement that creates a secondary obligation to support a primary obligation of one party to another.   In more simple terms, if a tenant fails to pay its rent under a lease, the guarantor undertakes to make those payments to the landlord instead of the tenant.

 

Can a guarantee be limited?   Yes, there may scope for negotiating a limit on the guarantee.  For example, if the lease were for five years then perhaps, provided the tenant complies fully with its lease obligations for one or two years, the guarantee may not need to apply to years three, four and five.   It may also be possible to exclude a family home from the guarantee.

 

Is a personal guarantee necessary?  After some thought you may find that the company is able to provide its own security such as offering a set rent deposit which in effect means the landlord has ‘money in hand’ which is accessible to him immediately in the event of default.   

Typically a deposit could mean paying an amount up to 12 months’ rent in advance and so whilst it may seem a good idea, a new business may not have the funds readily available or if they do, could impact on cash flow during the first year of trading.

 

Why you should seek legal advice before acting as a guarantee?

 

  • A guarantor must fully understand their obligations under the lease.  In some instances a lease can be changed without the guarantor’s approval and meaning a guarantor could become personally liable for new terms which they knew nothing about.

 

  • A Director’s guarantees impose a personal liability which means putting their personal assets at risk, including, for instance, their family home. If the tenant company goes insolvent and cannot comply with the Lease obligations this could also force the guarantor into personal bankruptcy.

 

  • If several directors act as guarantors (or give a single guarantee jointly and severally), action does not have to be taken against all of them in the event of a tenant’s breach rather than claim from just one.

 

The legal advice that you need can be sought from Willsons and if you need help, don’t hesitate to call our

Litigation and Dispute Resolution team on 02476 387 821.  Please ask for Lorraine Walker or Manjit Kaur-Heer.   Alternatively you can email them at lwalker@willsonslegal.co.uk or mkaur-heer@willsonslegal.co.uk