By Laura Harman, Solicitor in Commercial Property & Development.
A guarantee should never be entered into lightly - there will be significant financial consequences for the guarantor if the guarantee is enforced. Protect yourself from these consequences using our top tips.
In the current climate, landlords often require security for the performance of tenant’s obligations from company directors, business associates and even family members. If the tenant defaults, a guarantor will often be required to take a new lease in place of the tenant or pay the landlord a substantial sum of money.
If asked to act as a guarantor, consider these tips:
1. Offer a rent deposit
A rent deposit provides the landlord with security that the rent will be received. If the tenant does not have cash, the guarantor could lend the tenant money on terms agreed privately between them.
2. Negotiate with the landlord
Seek to limit the term of the guarantee to a number of years rather than the whole of the lease or cap your liability to a fixed amount.
3. Review the lease
It is important to remember that there is no standard lease. If you could be required to take a new lease you must understand all the obligations that may be imposed on you so reviewing the lease is crucial.
4. Can you afford to help?
If required to take a new lease you will have to pay the yearly rent and potentially insurance, service charge and VAT. You will also have repairing obligations.
5. Assess the tenant’s financial status
Check the tenant’s accounts and business plan. If they cannot comfortably afford the lease, it is more likely your guarantee will be called upon.
6. Have an exit plan
Make sure the lease allows the tenant to assign or sub-let the lease. This may give you a way out if the guarantee is enforced.
7. Negotiate with the tenant
A right to participate in the tenant’s decision-making may reduce the risk that the guarantee is called upon. Non-profit sharing voting shares allotted to the guarantor are one method.
8. Request security from the tenant
You could ask for security from the tenant. This must be carefully thought out but could include a charge over a director’s property.