PDA

View Full Version : Extent of Guarantor Liability



mikec1972
23-02-2010, 11:23 AM
One month ago I agreed to act as guarantor for my fiances brother who is on disability allowance. As long as I’ve known him i’ve had no reason to doubt his honesty or integrity and see no reason why this would change in the future. I was approached initially by his mother to act as his guarantor and then my fiance, neither of whom earn sufficient income to stand as guarantor. I felt a little bit backed into a corner and not wanting to be the one that would scupper his first chance of independence I agreed to stand as guarantor, assuming (and from reading previous posts this will be a familiar tale) that my liability would be confined to the initial duration of the contract (12 months with a 6 month mutual break clause).

At this stage there have been no missed payments or any other financial liabilities incurred on myself but I would like to know where I stand should this become the case further down the line. My biggest concern is that I have signed up to be his guarantor for an indefinite period over which I have no control…ad infinitum. This worries me as I had assumed that I would have just as much right to serve notice and withdraw from the role of guarantor as the tenant would if he wanted to withdraw as tenant, ie issue two months notice prior to the end of the initial fixed 12 month period, then if I wanted to I could sign again to act as guarantor for another twelve months, I never considered it would be an indefinite obligation over which I had no power to withdraw.

Understandabley if we ever go our separate ways I don’t want to be in a position where I am legally responsible to underwrite any financial liabilities for as long as he wants to remain in the property which for arguments sake could be decades.

I was emailed a copy of the tenancy agreement at 8.15pm on the 26th Jan 2010, with a request from the agent to “just read page 17 and sign and return to me thanks”, and I signed and returned at 8.15am on the 27th Jan 2010. There is no mention of the word deed in the tenancy agreement and the role/ responsibilities of the guarantor are not defined in a standalone agreement or section, they are merely inserted as a clause at the end of the agreement with the following paragraph:-

Guarantor

I (signed)

Have agreed to act as guarantor(s) of the this tenancy (and any extension) and be responsible to the landlord for any loss, damage, costs or other expenses (including rent) arising out of the tenants breach of, or failure to comply with, the obligations and responsibilities of this agreement.

I don’t have any problem with paying his rent if he runs into any difficulties but I need to understand the duration of my liability and whether I can serve notice to withdraw from my obligations as guarantor at the end of the initial fixed term OR sign up again to act as guarantor for another 12 months, I just need to understand whether I have tied myself down for an indefinite period by signing to the initial fixed period.

One more point-since my liability extends beyond the payment of rent arrears would it be a good idea to take out buildings insurance to insure myself against any accidents he might have (which an insurance company might cite as negligence such as leaving on a tap or iron). His flat is on the second floor and if he has any major accidents it could also damage the flats below and if the landladys insurance (if she has any), doesn’t pay up, I may as well get my coat:eek:

Your help would be much appreciated.

dominic
23-02-2010, 11:52 AM
The guarantee you have signed may be ineffective (that is, not enforceable against you).

Two points which may help you:

1. Validity of Guarantee

For a guarantee to be enforceable, the following must be true:

a. it must be in writing;
b. it must be signed by the guarantor or someone authorised on his behalf; and
c. it must be a valid contract, or executed as a deed.

a. and b. are requirements under s.4 of the Statute of Frauds Act 1677 (a very modern piece of legislation!) which appear to hav ebeen satisfied.

c. is more problematic (for the LL), because the document you signed does not appear to comply with the requirements for a deed (labelled as a deed, witnessed, and "delivered" to the promisee), nor is there any consideration flowing to you ( = benefit to you) meaning that it is unlikely to be enforceable either as a deed or a simple contract.

2. Extent of guarantee

Assuming your fiance's brother (let's call him T), entered into a fixed term tenancy (let's say 12 months for argument's sake), then you have only guaranteed his obligations under that tenancy only to the extent those obligations are not varied.

In the event the tenancy is extended, renewed or rolled over into a statutory period tenancy over and above the 12 months fixed term, your obligations will be discharged*, unless you consent to that variation.

So in short, I don't think you need to worry.

* N.B. if there is an "option to extend" the tenancy in the tenancy agreement, the position may be more "grey", but this is unlikely.

Lawcruncher
23-02-2010, 11:56 AM
On the face of it the guarantee is unlimited as to time and amount. You cannot withdraw. You have failed to follow the three golden rules:

1. Never stand as a guarantor.

2. Remember rule 1.

3. If you are going to break rules 1 and 2 never sign a guarantee without taking legal advice.

Have a look at post No. 7 in this thread: http://www.landlordzone.co.uk/forums/showthread.php?p=183250&highlight=guarantee#post183250

The question of whether a deed is necessary for a guarantee has been much discussed in this forum. The best we can say is that if a guarantee not made by deed is relied on it is worth arguing that it should have been by deed, but that the argument may not impress the court.

You certainly cannot take out buildings insurance as you have no insurable interest in the building. I suppose you could in theory take out insurance against the risk you will have to pay up under the guarantee, but I have to doubt whether such insurance is available.

Lawcruncher
23-02-2010, 12:04 PM
2. Extent of guarantee

Assuming your fiance's brother (let's call him T), entered into a fixed term tenancy (let's say 12 months for argument's sake), then you have only guaranteed his obligations under that tenancy only to the extent those obligations are not varied.

In the event the tenancy is extended, renewed or rolled over into a statutory period tenancy over and above the 12 months fixed term, your obligations will be discharged*, unless you consent to that variation.

In this case the wording says: "(and any extension)". I would not like to say exactly what "extension" means in this context. I think though that it has to include any statutory periodic tenancy that comes into effect and possibly an agreed extension. However, as you say, in the absence of any indication to the contrary, an increase in rent or other variation will discharge the guarantee if the guarantor does not agree to it.

dominic
23-02-2010, 12:18 PM
But it would be for the person benefiting from the guarantee (as per the contra proferentem rule) to demonstrate that any "extension" was not a variation of existing obligations.

Further, the recent decision in Triodos Bank NV v Dobbs [2005] EWCA Civ 630m would appear to suggest that where there underlying obligations are "varied" such that a larger sum is purportedly guaranteed, the guarantee will be discharged.

But yes, there is unsurety as to whether any variation has occurred at all in the event of an "extension". My view is that this would still amount to a variation given the indefinite nature of such extension and there being no ascertainable limit to the financial obligations guaranteed, and the OP's status as an unsophisticated guarantor (i.e. she is not a bank).

mikec1972
23-02-2010, 12:59 PM
Thanks for your replies.

I understand consideration and status of the agreement as a deed are potential areas that i could explore should i be forced to extend my guarantors obligation beyond the initial 12 month fixed tenancy period. It's not so much that i don't want to extend my role as guarantor beyond 12 months, i will providing the first twelve months go ok, i would just prefer it if it was my decision whether to extend my guarantors obligation every 12 months rather than it be out of my control.

The interesting term in the contract appears to be "and any extension" and how this would be interpreted in court, to my mind this seems as some of you have inferred a little ambiguous and given the potentially indefinite nature unfair or uncertain, it might also lend weight to the consideration argument. I must admit when i first read through this clause never having been involved in anything like this before i took it to mean any extension/ammendment of the conditions such as payment dates, conditions etc, now of course i know different, i would never have imagined i had signed myself to a potentially lifelong commitment over which i had no benefit or control.

However i live in hope that any new agreement or extension beyond the 12 month fixed date tenancy would in itself constitute a variation to the initial fixed term of the tenancy and therefore absolve me of my obligations unless i decided i wanted to sign up as guarantor for another 12 months. I would like to think that a judge would see that it would be unfair to tie in a guarantor against their will beyond the initial 12 month fixed term and would view the term "and any extension" as being uncertain, unfair and maybe lacking consideration but i fear the worst.:(

jeffrey
23-02-2010, 13:02 PM
In this case the wording says: "(and any extension)". I would not like to say exactly what "extension" means in this context. I think though that it has to include any statutory periodic tenancy that comes into effect and possibly an agreed extension. However, as you say, in the absence of any indication to the contrary, an increase in rent or other variation will discharge the guarantee if the guarantor does not agree to it.
"Extension" means renewal and cannot easily be made to include a statutory continuation tenancy.

Lawcruncher
23-02-2010, 13:54 PM
"Extension" means renewal and cannot easily be made to include a statutory continuation tenancy.

You may well be right.

dominic
23-02-2010, 13:59 PM
One practical solution you might consider is airing your concerns to T (the person whose obligations you are guaranteeing) - a good relationship in these scenarios often helps - and then when the opportunity arises request T enters into a new tenancy agreement with his LL.

A new agreement would create new obligations, the obligations in the old agreement having been discharged (relieving you of any potential liability under the existing guarantee).

Accordingly, this would give you an opportunity to negotiate more carefully the (new) guarantee you sign up to.

mikec1972
23-02-2010, 17:29 PM
Thanks again for all your advice.

Thankfully myself and the tenant are both on good terms and have been for a while, so i don't ever envisage their being a problem with the rent, but then i suppose guarantors never do.

If the worse ever came to the worst i just needed to understand what options were open to me at the end of the fixed term to release me from the agreement, without requiring the consent of the tenant.

I think it would be fair to say that when asked to stand as guarantor for a friend a layman guarantors assumption would be that he is obliged for the term of the tenancy which is emblazoned in big letters at the front of the agreement, not for an indefinite period which is implied in the final clause at the end of the document (unless the tenant agrees to release me-which would be unlikely if we ever fell on bad terms).

There must be a way that the law can acknowledge that it is unfair for a person to potentially be held over a barrell indefinitley beyond the fixed 12 month period of the initial tenancy.

I dont want to rock the boat to much yet as T has only been in the property a month but i might suggest after 6 months that T suggests to the LL a change in the contract to release me and i will pay 6 months rent upfront on T's behalf and every 6 months thereafter so long as the extent of my liability is confined to only covering the rent, not the structure or damage etc, and for periods of 12 months at a time to be re-agreed by all parties every 12 months-i'll mention that my partner is unhappy about using her house as security as mitigation for this. There is a mutual break clause above my guarantor clause on the final page of the tenancy agreement which i initially thought i was party to owing to the layout of the clauses, it is laid out as below;-

Mutual Break Clause

Any time after six months of the initial fixed term of this tenancy (or after a similar period following a fixed term extension to the original tenancy) either party may invoke this break clause by providing a minimum of two months written notice to the other (such notice to expire on the last day of a rental period of the tenancy). At the end of such notice the tenancy shall end and all obligations and responsibilities shall cease; subject nevertheless to any claim by either party against the other in respect of any breach of any of the terms and conditions of the agreement.

Guarantor

The following person(s)

•Me

………………………………………… ………………………………………

have agreed to act as guarantor(s) of the this tenancy (and any extension) and be responsible to the landlord for any loss, damage, costs or other expenses (including rent) arising out of the tenants breach of, or failure to comply with, the obligations and responsibilities of this agreement.

jeffrey
24-02-2010, 10:52 AM
To ensure that Guarantors are legally obliged, it's best to use a separate Deed of Guarantee- executed as a Deed; that avoids arguments about possible unenforceability of their covenants for lack of contractual consideration.

mikec1972
24-02-2010, 18:15 PM
"Extension" means renewal and cannot easily be made to include a statutory continuation tenancy.

Would this then mean that a renewal after 12 months could tie me in also without my consent? Or would a renewal or other form of extension such as exchange of letters to extend the original agreement constitute a new tenancy agreement therefore requiring my consent?

jeffrey
25-02-2010, 11:50 AM
You are L; you are already bound by what you agreed (so you did 'consent', surely?)

dominic
25-02-2010, 12:30 PM
To ensure that Guarantors are legally obliged, it's best to use a separate Deed of Guarantee- executed as a Deed; that avoids arguments about possible unenforceability of their covenants for lack of contractual consideration.

That is for the LL to ensure, not the G!

If you, as G, can get away signing a simple contract and not a deed, all the better for you.

jeffrey
25-02-2010, 12:54 PM
That is for the LL to ensure, not the G!

If you, as G, can get away signing a simple contract and not a deed, all the better for you.
Oops. Yes, I wrongly assumed that mikec1972 was L, but of course he's G. Sorry.