It is common for landlords to insist that there is a third party guarantee on a leasehold if they feel that the tenant has not sufficiently showcased that they are financially stable and reliable. This is often the case for owners with a poor credit history or companies with limited trading history.
What Is a Guarantor on a Commercial Lease?
A guarantor on a commercial lease agreement is an individual who enters into a legally binding contract agreeing to supply payment for any debt in the event that the tenant defaults on the lease obligations. This means that if the tenant does not pay the monthly rental fees they are required to, the guarantor will need to cover the cost.
However, there are a number of other costs that are often overlooked. This not only includes unpaid rent and operating expenses, but it could also include financial inducements to secure a replacement tenant, agent’s fees, penalties, and legal fees.
Unless the landlord and the tenant come to an agreement regarding an exit strategy, the landlord may take legal action and the court may demand that the personal assets of the guarantor are sold so that any outstanding amount is recovered. Therefore, it is important to recognise that asking someone to be a commercial lease guarantor is a big undertaking.
Who Can Be a Guarantor?
There are typically two forms of commercial lease guarantee: a bank guarantee or a third-party guarantee.
Bank guarantees are very rare. They involve the tenant’s bank agreeing to pay a capped sum if the tenant defaults on the payment. Such guarantees are incredibly hard to secure.
A third-party guarantee will involve a party connected to the tenant agreeing to be a guarantor for the lease. This will usually be a family member, a business associate, a company director, or a shareholder.
What Are the Duties, Rights and Responsibilities of Commercial Lease Guarantors?
As a guarantor on a commercial lease, this person is guaranteeing the obligations of the tenant as they are at the date the lease is entered into. This means they are legally responsible to pay the rental fees until the end of the contract if the tenant defaults.
However, the question of what exactly your guarantor is responsible for depends on the specific terms and conditions of the contract you have signed and the wording that has been used. This determines whether the guarantee is legally enforceable. There could, for example, be a break clause in the lease that enables the tenant to terminate the agreement before the end date, or there may be a limit on the guarantee.
Alternatives to Using a Commercial Guarantor
Most commercial leases are flexible, and so it is worth negotiating with the landlord to see if you can come with an alternative solution. The most obvious option would be to offer a substantial rental deposit.
If you do not have the cash reserve for this, you could ask the guarantor to lend you this money and they could draw up a private agreement between you both. Or, you could look into securing a loan for this money. Find out what you need to know about this here. Another option is to offer to pay a higher monthly rental fee instead of having a personal guarantee.
If the landlord insists on a commercial guarantor, limiting this guarantee will provide the third-party with a bit of protection. There are several options in this regard, including:
- agreeing to guarantee a fixed amount;
- a guarantee that expires after a certain period of time;
- a guarantee that is limited to a certain amount once a set period of time has passed.
Another option that provides further protection for the guarantor is to enter into a side deed with the tenant. This is only a solution if the guarantor and the tenant are independent of one and other, i.e. you cannot be a company director.
With such an agreement, the tenant will owe specific obligations to the guarantor, as opposed to all of the obligations being owed to the landlord. For instance, the side deed may include an indemnity to cover all liability or losses suffered by the guarantor, or it may document certain events whereby the guarantor’s consent is needed.
Should You Seek Legal Advice Before Agreeing to Be a Commercial Lease Guarantor?
It is imperative to seek expert legal advice before entering into any type of guarantor agreement, especially those of a commercial nature. Commercial leases tend to be very complex, and so it is vital that you fully understand the ramifications that will be placed on you if you enter into such an agreement.
A legal advisor with experience in this field will be able to provide you with impartial advice, as well as explain the ins and outs of the contract so you can be fully aware of what this means for you. They will also be able to assist you in drafting a contract that you are happy with so that you and the guarantor are protected.
They will also be able to determine whether a guarantor is necessary, as there could be a way to secure the lease without going down this path. Ultimately, a legal advisor can enter into negotiations with the landlord to ensure you get the best deal.
Hopefully, you now have a better understanding regarding seeking a guarantor on a commercial lease. As you can see, this is a big decision for anyone to enter into, and so it is really important to understand this and explore alternative options too.