Guarantees in Leases
Tenants should not enter into commercial leases lightly. When most tenants take the form of a company structure, the Landlord usually requires personal guarantees from the directors and shareholders. What are you personally guaranteeing? Predominantly, the guarantors will guarantee the payment of the rental and OPEX (operating expenses, aka outgoings eg rates, insurance etc) up to the end of the term of the lease if the Tenant defaults and can’t pay. This is an important point not to be overlooked. If the lease is assigned during the term of the Lease to another Tenant who subsequently defaults and doesn’t pay the rent the Landlord will look to the Guarantors for payment.
The guarantee also extends to the covenants implicit in the lease eg: repair and maintenance provisions.
How can the Guarantor mitigate their obligations?
- At the negotiation stage of the lease the tenants can negotiate so that the obligations of the guarantee terminate after a period, for instance, 1 or 2 years. The Landlord might be more amenable to this idea if the release is on the proviso that the tenant has complied with the obligations of the lease; or
- The guarantee could terminate on assignment of the lease; or
- The Tenant might try to assign close to the expiry of the term; or
- Another option may be to limit the amount the Guarantor is obligated for ie: a fixed sum.
There are options that can be explored in negotiating a new lease. Usually its preferable to enter into an Agreement to Lease to flush out any issues before being committed to the actual Lease itself.
Before you leap, talk to the team at Law4You to discuss your options.