UK: Guarantor Liability – Are You At Risk Without Realising It?

Last Updated: 15 June 2009
Article by Kate Sutton

In the current uncertain economic climate and with the threat of tenant insolvencies, now is as good a time as any to take stock of any lease guarantees you may have either provided or which you may be able to rely on as a landlord.

Is Someone Still 'On The Hook' For A Guarantee Without Realizing It?

Guarantor liability can continue for as long as the tenant for whom the guarantee was given remains liable for rent arrears and breaches of other tenant covenants in the lease.

The potential liability of a guarantor can be determined by a simple review of the guarantee itself where the guarantor is that of the current tenant. However, there remains scope for guarantors of a tenant no longer in possession – or even in existence – to find themselves liable for a tenant's obligation under a lease.

In such situations there is clear distinction between so-called "old" and "new" leases – i.e. those that began before 01 January 1996 ("old leases") and those that began after this date ("new leases").

You may not realise it, but guarantors can still be exposed to old leases until the lease expires or is terminated, even if the lease has been assigned once or many times over and the guarantor no longer has any connection to the current tenant.

Under new leases, guarantors remain 'on the hook' until the tenant assigns the lease and usually, guarantee liability is also there to cover the duration of any authorised guarantee agreement which the tenant is required to provide on assignment of the lease. Therefore, an original tenant of a new lease would be liable, for example, for any rent arrears or dilapidations claim, if its immediate assignee became insolvent.

Practical Steps To Take

If the tenant does become insolvent or experiences financial difficulty and falls into rent arrears, you do not want to put your own liquidity at risk, and there are certain steps which you, as either landlord or guarantor, can take to protect your position.

1. Know The Extent Of The Guarantee Liability

Firstly, carry out an audit to determine whether any guarantees have been provided and in respect of which properties, and for which tenants those guarantees have been provided:

  • Have any of those guarantees been released, and if not, what is the extent of the guarantor's liability under them and when is the guarantee triggered? For example, is the guarantee triggered automatically, or is it only triggered when the landlord serves a formal demand on the guarantor?
  • If the guarantee is triggered, is the guarantor liable to pay the rent only or does the guarantor's liability extend to payment of the rent and performance of the repairing and other tenant obligations in the lease? Normally, the liability will cover all obligations in the lease.
  • Does 'rent' include service charge, insurance premiums and/or any other sums?
  • Is the landlord entitled to pursue the guarantor for these sums directly or is the landlord obliged to pursue the tenant in the first instance?

These are the types of questions which you should be considering and, where necessary, legal advice obtained. Much depends on the construction of the wording of both the guarantee and the lease for which the guarantee has been provided, and it could be costly if you get it wrong!

2. Be Alert!

It is equally important to be alert to any financial difficulties which the tenant may be experiencing, and increasing communication between the parties involved is crucial. If you, as the guarantor, are the director of a tenant company guaranteeing the company's obligations under the lease, you will know intimately the financial position of the company, but where the relationship between you and the tenant is at arm's length it is important to be proactive and alert to the tenant's financial position. Likewise, as the landlord, if good communication has not been established early on in the landlord–tenant relationship, the tenant may be reluctant to approach you with concerns about any financial difficulties it may be experiencing in order not to alarm you or the tenant's customers and debtors and/ or by seeking to trade itself out of any financial difficulties.

As well as increasing channels of communication with the tenant, there are also 'soft' indicators which may alert you to any potential problems. Typical signs of a tenant's financial distress may include:

  • A decline in the reputation and market perception of the tenant's company or business;
  • The tenant re-launches/ re-brands itself or undergoes major re-financing;
  • The tenant experiences a fall in staff morale;
  • Senior managers/ directors restructure or leave the tenant company; and
  • The tenant delays payments beyond credit terms, disputes invoices or makes erratic payments.

If you are considering requiring or entering into a guarantee under a lease, some issues which you may wish to consider include whether the guarantor keeps the landlord informed of any breaches of covenant by the tenant, and/ or whether the landlord allows the guarantor a specific period of time to try and remedy any tenant breach of covenant before any guarantor liability may be triggered under the guarantee. These types of clauses are issues which can be negotiated at the outset and again this is something which you should discuss with your solicitor.

3. Market Trends – Opportunity For Creativity

Where the tenant does get into difficulties, in the current financial market we are seeing more creative solutions for landlords to retain those tenants, such as temporarily reducing rent or varying lease terms, in order to keep the premises occupied to avoid taking the chance of having to re-let the premises and pay property rates or, in some cases, to avoid giving rise to management difficulties and occasionally to avoid an adverse impact on the value of the reversion. In some cases, it may be beneficial to allow the tenant to sub-let or assign the whole or part of the leased premises to share or reduce the risk of exposure. Early negotiations are a good idea to canvass what legal and commercial options may be available to reduce any tenant financial distress and similarly your potential exposure.

4. What Can You Do If The Guarantee Is Triggered?

If all of these preventative measures fail, and the tenant does become insolvent, then there are options available to you:

  • negotiate a new replacement lease of the premises to the guarantor; or
  • negotiate a payment by the guarantor to the landlord in consideration for the release of the guarantee; or
  • do nothing for the time being. However, in the event that no action is taken, both the guarantor and the landlord could be left in the unsatisfactory position that:
    • the guarantor retains the liability for past breaches and outstanding rents (and in the case of a disclaimed lease, also for future rent and compliance with the disclaimed lease covenants) but may not have possession of the property and so be unable to sublet or assign the premises. It should be noted that a guarantor can since 1996 require the Landlord to grant it a new lease if it pays the arrears; and
    • the landlord is left with a property which may be physically unoccupied and closed for trade or business and unable to re-let or sub-let the property to another financially viable tenant (and in the case of a disclaimed lease, may have difficulty or be unable to recover any outstanding sums from the guarantor under a lease which technically no longer exists or has any legal effect).

There are often time limits associated with these procedures which need to be strictly adhered to and you should contact solicitors early to ensure that you are not prejudiced by missing any of these deadlines. Likewise, the benefits and disadvantages of each option and the potential scope for negotiation will depend on the particular circumstances of each case and you should seek legal advice as soon as possible.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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