Acting as Guarantor of a Lease: Things to Consider
In the context of a Lease, a Guarantee is a promise by the Guarantor to the Landlord that the Tenant will fulfil their obligations under the terms of the Lease, and if the Tenant fails to do so, the ‘Guarantor’ will be liable.
Any individual or company can be a Guarantor for a commercial lease. If the Guarantor is an individual, they will be personally liable which means that unlike a limited liability company, their personal assets are at risk in the event of the Tenant defaulting.
Where there are two Guarantor’s the liability is often ‘’joint and several’’, a common misunderstanding is that this means the liability is split equally, which is not correct. Joint and several liability means that one Guarantor will be fully liable should the other be unable to meet the obligations under the terms of the Guarantee. This will include payment of rent and other liabilities such as unlimited repairing covenants, costs of which could be substantial. The Landlord can take legal action against either Guarantor for the whole liability. Where the Guarantor is unable to comply, this could lead to bankruptcy.
Most leases will contain a provision that the liability of the Guarantor will not be affected by a future variation of the Lease, this could mean that the Guarantor is obliged to adhere to terms that aren’t yet in the Lease and of which they do not know about.
If the Tenant assigns the lease to a third party, the Tenant will usually have to enter into an Authorised Guarantee Agreement (an ‘’AGA’’). This is an agreement by the Tenant to the Landlord that the Tenant will remain on the hook where the incoming Tenant defaults. As Guarantor and in the event that the Tenant assigns the Lease, this could result in the Guarantor having to enter into a Guarantee of the authorised Guarantee Agreement (an ’’GAGA’’) meaning the Guarantor will be liable not only for the Tenant’s liability under the lease, but also the Tenant’s liability under the terms of the AGA.
This could leave the Guarantor in a vulnerable position as they may not have any control over who the Tenants assigns the Lease to and ultimately could be liable for the incoming Tenant defaulting on their obligations.
Consequently, appropriate legal advice should be sought by a Guarantor when agreeing to guarantee a Lease or legal agreement as the Guarantor needs to fully understand their level of liability in the event that the Tenant (or other third party) fails to meet their obligations under the Lease or other legal agreement.
For further information, please contact:
Adele Walker
Solicitor, Real Estate
adele.walker@brmlaw.co.uk
