The quick answer is because a guarantor is another party who can be pursued for the arrears and/or damages.
A guarantor is someone who agrees to guarantee the obligations of someone else. Many landlords, especially of commercial premises but also increasingly residential landlords, are seeking property owner guarantors in place of, or as well as, a deposit. It is important that the guarantor has assets, like a property, that can be enforced against if the guarantor cannot or does not pay.
The term guarantor is commonly used in commercial and residential property agreements (AST’s or a lease of commercial premises) A company Director can be asked to provide a personal guarantee for the liabilities of a limited company. When a guarantee is given by an individual there is no practical difference between a personal guarantee and a guarantee- they mean and refer to the same thing.
For a guarantee to be legally valid it must be in writing and signed by the guarantor. A guarantee cannot be provided verbally which is often overlooked.
Guarantor agreements are contracts in their own right. The validity of a guarantee can become extremely important, especially when a tenant won’t leave and/or creates damage in a property, or where a company becomes unable to pay monies due and owing. There are some basic steps that can be taken to ensure they remain legally valid. First, as above, the guarantee agreement must be in writing and signed by the guarantor. There must also be ‘consideration’ in order that the guarantee contract is valid. Usually consideration will be the landlord agreeing to grant the AST or lease to the tenant and the consideration should usually be expressly stated to avoid any confusion or risk. We prefer that the signature is also witnessed by a third party. This creates a deed and where a guarantee is provided within a deed, consideration is not required.
The second point is to be clear on the difference between a guarantee, and an indemnity. These are often used together but in fact are separate legal terms with different meanings.
A guarantee means that the guarantor will step in if the tenant does not do or act as they have agreed. The specific terms of the guarantee will vary depending on the contract between the landlord and tenant.
An indemnity is a free standing, or primary, obligation that is not dependent on the borrower’s default and is enforceable in its own right. Many legal documents are drafted to include both a guarantee and an indemnity, but this should be checked.
Another factor to consider is that guarantee contracts are subject to a test of reasonableness in accordance with Unfair Contract Terms Act 1977. With that in mind we would always advise landlords and agents to keep the content as straightforward as possible not least because worst case we want to be able to rely on the content of the contract in full.
Sometimes guarantees can be avoided if the terms of the agreement have been varied in a material way and a well drafted guarantee should be drafted with this in mind. For assured shorthold tenancies the guarantee should expressly cover any contractual or statutory periodic tenancies and any changes in rent or other material terms.
Although many landlords and letting agents will have a standard form of guarantor agreement that can be used care should be taken to ensure the above basics are covered on each and every occasion.
Landlords and letting agents will be well aware of the impact that legislation has had on deposit registration and access. From their perspective this will have made deposit taking more cumbersome, bureaucratic and time consuming. Obtaining guarantors can therefore provide a useful and effective alternative strategy although the value of any guarantee is linked to the solvency of the guarantor themselves.
– Landlord and Letting Agents should consider obtaining guarantors as a useful additional strategy to protect against problem tenants defaulting on rent or leaving a property in disrepair;
– Any guarantee must be in writing, with checks in place to ensure that it is valid and can be relied upon if necessary;
– Ensure that the content of the AST, lease or loan agreement, and separately the content of the guarantee itself, are legally binding and sufficiently clear and robust so that they can be relied upon by you if necessary;
– Keep in mind that a guarantee is a safety net and matter of last resort. If you are relying on the guarantee it will mean that there is a problem somewhere already- don’t make the content of the guarantee or some other technicality become another problem.
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Alex Cook is a Director at Helix. Alex initially trained academically as an unregistered barrister and was a Partner and Head of Civil Litigation at a large firm based in the South East before joining Helix Law. As well as focussing on expanding Helix, Alex specialises in commercial and property related litigation and he has acted for a broad range of clients including offshore property investment funds, small businesses and individual property owners.
This article is written to raise awareness of the issues it discusses and it may not be updated after it is first written, even if the law changes. It is not intended to be legal advice and cannot be relied on as such. Helix Law is not responsible or liable for any action taken or not taken as a result of this article. If you think the matters set out affect you and you wish to apply them to your particular circumstances then we are happy to give you free initial telephone advice.