Guarantees In Commercial Leases: What You Need To Know

Guarantees in commercial leases

Guarantees are a common feature of commercial leases and can have significant financial consequences for tenants, guarantors and landlords.

As Commercial Property Solicitors, we regularly advise clients on guarantees when negotiating new leases, assigning existing leases and where tenants enter into authorised guarantee agreements (AGA’s). Understanding the implications before signing is crucial to help clients made informed decisions and avoid unexpected liabilities.

What is a lease guarantee?

Commercial lease guarantees provide landlords with added security under which a third party, known as the guarantor, agrees to comply with obligations in the lease if the tenant fails to comply with them. Depending on its terms, this may include unpaid rent, service charges, repairs and other liabilities under the lease.

Clients often ask:

Does this mean I will have to pay rent if the tenant does not?

Potentially yes, if the tenant defaults, the landlord may be entitled to pursue the guarantor for liabilities covered by the guarantee. A guarantee can therefore expose an individual or company to significant financial risk, even if they do not occupy the property themselves.

In commercial leases, where a company is the tenant of a lease, often a director will be the guarantor. The director will be putting their personal assets at risks if the tenant does not pay. This can include the director’s personal home, for example. If the director leaves the company, they will still be personally liable under the agreement. Therefore, guarantees can be extremely onerous.

Why is a personal guarantee required?

Landlords or lenders may request a personal guarantee where the tenant or purchaser is a new company with little or no trading history or where the business has limited assets or insufficient financial resource.

It is important to note that the guarantor may be on the “hook” for more than rent. Depending on the wording of the guarantee, this can extend to all tenant covenants including, keeping the premises in repair, reinstating alterations at the end of the term and paying service charges and complying with other restrictions, as well as any interest or other charges.

Depending on the wording, a guarantee can allow the landlord to pursue the guarantor without first exhausting remedies against the tenant. That means if the tenant misses rent, the landlord may be able to go straight to the guarantor rather than negotiating with the business.

What is an authorised guarantee agreement (AGA)?

An AGA may be required when a tenant assigns its lease to another party. Under section 16 of the Landlord and Tenant (Covenants) Act 1995, a landlord may, in qualifying circumstances, require an outgoing tenant to guarantee the incoming tenant’s performance of the tenants covenants as a condition of consenting to the assignment.

Some clients may ask “if I assign my lease, am I released from all responsibility?”

Not necessarily, although the 1995 Act generally releases the outgoing tenant from its tenants covenants on assignment of a qualifying lease, an AGA can leave the outgoing tenant liable if the incoming tenant defaults.

Can a guarantee be brough to an end?

Clients sometimes assume that a guarantee automatically ends when a lease is assigned, varied or renewed. This is not always the case. The outcome depends on the wording of the guarantee, the transaction and the applicable law. Lease variations can also affect a guarantors liability, so the position should be reviewed before changes are agreed.

Key Takeaways

Guarantees can provide valuable protection for landlords and lenders but may create substantial liabilities for guarantors and outgoing tenants. Whether entering a new lease or assigning an existing one, clients should obtain advice before signing to understand the extent of their obligations, how long liability may continue and what protections may be available.

For advice on this and other aspects of personal guarantees, contact our team today.