Guarantees are a common feature in commercial leases.
A guarantor will usually guarantee all of a tenant's obligations under a lease, including payment of rent. This provides security to the landlord and can help to maintain continuity of rental income regardless of the default or insolvency of the tenant.
However, guarantees are not infallible – landlords in particular should be aware of a few key points when dealing with them in Scotland.
Release of guarantors
Problems can arise with the enforcement of guarantees where the obligations being guaranteed have been changed without the guarantor's consent.
A guarantee will typically contain wording which states that the guarantor consents to, and will continue to be bound by, the guarantee notwithstanding any subsequent lease variations agreed between the landlord and the tenant. However, these clauses should be treated with care.
If the variation that occurs is so significant that it changes the fundamental nature of the obligation or has the effect of creating a completely new obligation, then a guarantor will be released regardless of the consent clause.
A common pitfall occurs when the tenant carries out alterations and a licence for works is entered into without the consent of the guarantor. This may sound innocuous, but if the works are extensive then it has the potential to dramatically vary the tenant's repairing and reinstatement obligations.
To avoid doubt, the guarantor's consent to any variation should always be sought.
Can a landlord insist on an AGA in Scotland?
Scottish law does not recognise the concept of an authorised guarantee agreement (commonly referred to as an AGA).
Therefore, as a condition of its consent to a proposed assignation, there is typically no ability for a Scottish landlord to require that the outgoing tenant provides a guarantee.
A landlord must instead rely on other protections in the lease (such as its right to withhold consent to a proposed assignation where reasonable to do so). It may be reasonable for a landlord to require that the incoming tenant offers up a guarantee, however, unless the parties are connected, that guarantee is unlikely to be offered up by the outgoing tenant.
Can I withhold consent to assign where the new tenant/ guarantor is of a lesser covenant to the current tenant/ guarantor?
The answer will largely depend on the wording of your lease but it is unlikely that you'll find a lease with "equivalence" provisions (i.e. incoming tenant/ guarantor to be of no lesser covenant than the existing tenant/ guarantor).
If it did, that would have the potential to make a lease incapable of being assigned, for example where the existing tenant or guarantor is a plc.
A new assignee/ guarantor may well have the financial wherewithal to meet the tenant's obligations under a lease, even if it is not publicly listed.
What to do if you're not sure about your lease guarantees
Guarantees can be useful devices, however, they should be treated with caution and care to avoid expensive legal pitfalls.
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.
