In brief - Make sure you manage the risk of providing a lease
The risk of guaranteeing a lease can be mitigated by offering
alternative forms of security, limiting your guarantee,
understanding what you are guaranteeing and entering into a side
deed with the tenant.
Guarantor responsible for all tenant obligations under the
While a personal or corporate guarantee represents security,
comfort and assurance for a landlord, conversely, it means
obligation, risk and liability for a guarantor. However, although
it may appear that giver and recipient sit on opposite ends of the
spectrum, a guarantee can be a mutually acceptable outcome for all
parties, provided that as a guarantor you understand the risk and
manage it to an acceptable level.
Under most lease guarantee clauses, a guarantor agrees to
guarantee all of the obligations of the tenant under the lease.
These obligations can extend beyond the payment of rent during the
lease term to such things as the cost of making good damage to the
premises, or upon default by the tenant and early termination of
lease, the loss suffered by the landlord in reinstating and
re-letting the premises, the cost of the reduction in rent if the
premises are re-let on terms less advantageous to the landlord and
legal costs in connection with tenant default.
Importantly, as distinct from a limited liability company where,
generally speaking, the debts of the company are not the debts of
its directors, any assets owned by a guarantor may be claimed under
Here are some points to consider before agreeing to guarantee a
Offer alternative forms of security
A cash security deposit or bank guarantee is less risky than
providing a personal guarantee. Although the tenant will have to
provide an upfront amount (usually an amount equal to between three
and six months of rent with or without outgoings), that amount is
fixed and known, whereas a personal guarantee is an unknown
quantity and potentially unlimited depending on the terms of the
Most commercial terms are negotiable and a landlord may even
accept a slightly higher rental in return for no cash security
deposit, bank or personal guarantee. A cash security deposit or
bank guarantee alone is a commonly accepted and sufficient form of
Limit your guarantee
If the landlord insists on having a personal guarantee,
negotiate limits on that guarantee. It may be reasonable to offer a
conditional guarantee such as one of the following:
a guarantee of a fixed amount agreed between the parties;
a guarantee that expires after a certain time period (it should
be a reasonable period to allow the landlord an opportunity to
reasonably assess whether the tenant is likely to default under the
a guarantee limited to an amount of rent after a set period of
time following default by the tenant or early termination of the
lease. For example, an amount equal to six or twelve months'
rent after default or termination may offer the landlord enough
comfort that it will be adequately covered for its costs, including
over those months when the premises may be empty pending marketing,
reinstating and re-letting the premises.
Understand what you are guaranteeing
Have a lawyer review the lease and explain what your obligations
are as guarantor.
Understand what is at risk and what you may lose.
Enter into a side deed with the tenant
If the guarantor is independent of the tenant e.g. not a
director of the tenant company, request that the tenant enter into
a side deed with you as guarantor. The benefit of this is, unlike
under the lease where all of the obligations of the tenant are owed
to the landlord, the tenant will owe certain obligations to you as
guarantor. If there is any breach by the tenant of those
obligations, you will have an action in damages against the
For example, you may consider documenting in a side deed
requirements as to what events under the lease will require the
guarantor's consent e.g. exercise of any option during the
lease term; and when and how the tenant must notify you during the
term of lease e.g. on carrying out works to the premises.
The side deed may also include an indemnity to cover all loss
and liability suffered by you as guarantor and/or a power of
attorney provision in respect of your right to be appointed as
attorney of the tenant to effect certain obligations not fulfilled
by the tenant.
In the years following the global financial crisis of 2008 many Australian investors lost their life savings as financial products failed and the Australian Stock Exchange shed over 3,000 points.
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