Sureties & Guarantees

Guarantors stand surety or in other words guarantee rent payments and other tenancy obligations in both residential and commercial property lettings.

The guarantor is the landlord's insurance policy against tenant default. He pays the landlord the rent if the tenant defaults, and he pays the landlord his losses, expenses or damages where the tenant fails to carry out his obligations under the lease.

With residential tenancies it is common for the landlord or agent to ask for a guarantor particularly when a tenant  has a low credit score. There are many reasons why a tenant may have a low credit score when credit checks are carried out. These include:

• Never having borrowed money or used credit cards
• No fixed address and/or not listed on the electoral role
• Lived at current address less than 6 months
• Lived abroad and returned to home country
• Worked for less than 6 months
• Student or job with low earnings
• History of debts, late payments or Count Court Judgements (CCJs)

With commercial tenancies it is also common for a guarantor to be required. Similar reasons apply here as with residential lettings, but commercial lettings may also include:

• Directors of companies may be asked to act as guarantors for the company, where the company is the tenant.
• New business and owners or directors with few assets.

One alternative to having a guarantor with a commercial tenancy is to have the person who is willing to act as guarantor become a joint tenant on the lease.

It is very likely that with a company, especially if it is newly formed, with few assets, the lease will be in the directors' names as tenants, not in the company name.

Guarantors should be checked out - verified and referenced just as would a prospective tenant.

Where a guarantor enters into an agreement he or she normally agrees to meet the full obligations under the tenancy agreement on the tenant's behalf.

This may include rent arrears, damage to the property, or other liabilities and obligations arising from the tenant's failure to comply with the lease covenants. The guarantor is contractually bound to accept these legal liabilities of the tenant and will be sued if they don't comply.

As with most types of legal action, claims against guarantors have been on the increase in recent years so the role of guarantor is quite an onerous one and not one to be entered into lightly.

The guarantor would usually need to be a home owner with steady long-term employment if she is to satisfy the requirements of a good credit score to become a guarantor.

Parents of young people or students are often asked to guarantee their children's rent. This, hopefully, is less risky for the parent, as they know that their child can be trusted?

However, parents need to be cautious here because joint residential tenancies for students or groups usually carry joint and several liability - this means that the parent is, in effect, guaranteeing all the other residents as well, not just their child!

A guarantor will be required to do two things:

• Complete a Guarantor's Application form
• Sign a Guarantor's Agreement

The guarantor's application form is similar to the tenancy application. Credit searches and references will be checked and all of the following:

• The individual's identity
• The property to be let
• Guarantor's personal details
• Residency information
• Legal history and any CCJ's
• Employment history
• Accountants, solicitors, character referee
• Bank and trade references for businesses
• Declaration allowing credit search & signature

The second part is the guarantor's agreement with the landlord. This states:

• The date of the agreement
• The term to which it applies, when and how the obligation ends
• The signatures and names of the parties to the agreement
• The property
• The names of the tenant/s

Points to watch:

The wording of the Guarantor Agreement is crucial. This is a legal contract and will be strictly enforced by the courts according to how it is worded - there is no standard form or statutory Guarantor Agreement.

Is the agreement confined to the original lease term, or will the obligation continue into subsequent terms or a periodic tenancy? Both parties need to be clear on this.

If the agreement states that the guarantor is a primary obligator the guarantor will be obliged to carry on paying until the end of the term certain, or when the tenant leaves if the tenancy has become a periodic one.

On the other hand, should the agreement state that the guarantor indemnifies the landlord against losses due to the tenant's default or failure to observe the agreement terms, then the landlord is obliged to minimise her losses.

For example, she may be expected to use possession proceeding or re-let as soon as possible if the tenant leaves within the term certain, leaving the guarantor to pay his rent.

However, the guarantee agreement may state that the landlord is not obliged to minimise his losses, in which case he could sue and the guarantor would have to keep paying.

In extreme cases the guarantor may be forced to sue the tenant for damages and apply to take over his tenancy, thus making it possible for her to terminate the tenancy agreement.

Particular care needs to be taken by guarantors of commercial leases where obligations can be for many years. Here, guarantors could find themselves guaranteeing the lease of a failed business, or where the tenant has varied the lease terms to the detriment of the guarantor.

Guarantors can therefore find themselves completely taking over the obligations of the original tenant, taking on more onerous terms or continuing to underwrite the lease for subsequent tenants.

The Code for Commercial Leases has this to say on Guarantors:

Guarantors - think carefully and seek legal advice before entering into long-term commitments.

© LandlordZONE 2006