In the context of a lease, guarantors play a crucial role in ensuring lease obligations are being exercised and fulfilled when the tenant fails to meet the lease requirements. This form of extra security can be commonly found in many leases. Before putting down your signature as a lease guarantor, there are things you need to consider.
By Katherine Sun
Who can become a Guarantor?
Any individual or company can be a guarantor for a commercial lease. Before accepting a corporate entity as a guarantor, the landlord will normally check on its trading history and ask it to provide its bank statements, evidence of assets and trading references to assess its suitability. Landlords normally do not like companies which are newly incorporated or have no assets, as a company’s liabilities are normally limited. Once the company is dissolved, landlords will lose their security.
If you are an individual acting as a guarantor, you will take on personal liability for the obligations under the lease. Unlike the limited liability that a company has, you will be personally liable if the tenant defaults. It is important to note that your personal assets may be at risk. Of course, landlords will also carry out credit checks on you to find out whether you have any properties and your credit rating, which is the same with corporate guarantors.
What can happen to a Guarantor?
Generally, a guarantor is required to step in whenever a tenant defaults in their obligations under a lease. It could be failure to pay rent, to repair or to do (or not to do) something else. In practice, a landlord will normally seek enforcement against the tenant first. When failed, they will take action against the guarantor.
Depending on how a lease is drafted, it is not necessary for the landlord to serve a formal notice to the guarantor to continue fulfilling the lease obligations such as rent arrears or a repair covenant. Once the concern is raised with the guarantor, the liabilities are accrued. In the event that the landlord forfeits the lease due to a tenant default (or the tenant simply abandons the lease and vanishes, the landlord will typically require the guarantor to take on a new lease or make a payment to the landlord to satisfy the liabilities within the lease. If the guarantor also fails, the landlord could start legal actions against both tenant and guarantor.
How long will a Guarantor’s liabilities last?
Unless stated otherwise, a guarantor’s liabilities normally last as long as those of the tenant’s for whom it guarantees, which is normally until the lease comes to an end, is surrendered or the tenant is released from its liabilities by the landlord following assignment of the lease to someone else or in any other ways.
A guarantor can also be replaced with another guarantor, provided that the landlord agrees to it.
Understanding the meaning and potential liabilities of guarantors in leases is crucial for all parties in commercial conveyancing. It is vital to identify the risks and complications before you agree to become an individual guarantor.
If you have any query on this issue, please do contact our commercial conveyancing solicitors to find out more about the process and your business’ needs. We provide comprehensive advice that suits your objectives and aims.
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