There is an old saying that ”[A] guarantor in nothing but a fool with a pen.” However, this need not be the case if guarantee documents are either read carefully or taken to your solicitor. In the case of guarantees provided under Leases they can in many instances be negotiated.
When entering into an Agreement to Lease or a Lease where the Tenant is a Company or Trustee, the Landlord may ask for due performance of Tenant’s obligations by way of personal guarantees. The directors, trustees, beneficiaries or shareholders usually provide these guarantees. Landlords ask for guarantees due to the commercial and trading nature of trusts and companies.
An individual providing a guarantee is entering into a covenant with the Landlord to perform all the Tenant’s obligations under the Lease in the event of the Tenant’s default. These guarantees need to be read carefully before signing because in most instances the Landlord can demand performance from the guarantor prior to enforcing a default against the Tenant. Furthermore, guarantors need to be careful in the circumstances because most guarantees provided also incorporate an indemnity allowing the Landlord to recover almost all costs in connection with the issuing and recovery of any default against the Tenant. It is best to provide guarantees and indemnities that can only be enforced once a Landlord has reasonably perused the Tenant for payment of the default.
Guarantors also need to be aware that their obligations may extend to guaranteeing the performance of the purchasing Tenant should they sell the Tenancy. This is usually the case for commercial and Retail Shop Leases. However Retail Shop Leases must release the current Tenant but not the Guarantor. Care should be taken when entering into the commercial and Retail Leases to ensure that the Guarantor is also released. The Landlord’s deed of assignment documents should be studied carefully to ensure that the guarantee is not transferred to cover the obligations of the new Tenant or extended to the new Tenant’s Option Term.
The best commercial practice from a Tenant’s point of view is to offer a cash bond or Bank Guarantee at a much higher rate in exchange for not providing personal guarantees. Prior to entering into a Lease the Guarantor should seek advice from their accountant to ascertain the assets that are held in their name personally that would be at risk by giving the Guarantee.