Guarantors play a crucial role within business leases. They are an individual or entity that enters into an agreement to take on the obligations of a tenant if they default. They provide a commercial safety net for landlords, especially where a tenant has no credit history. A guarantor can be bound for the entire duration of the term or until specific conditions are met.
The Guarantee
The obligations are set out in a guarantee agreement, which may be incorporated into the lease or set out in a separate document. The agreement will generally set out the limit of the guarantee; the duration of the obligations; circumstances where the obligations will be triggered and any release conditions.
What to consider before becoming a Guarantor
- There can be significant financial implications if a tenant defaults and the guarantor is required to cover the associated costs.
- Legal advice is vital to identify potential risks under any guarantee agreement and negotiating fair terms (e.g. limiting liability or establishing conditions to be released).
- The guarantor’s credit rating may be affected if they are called upon to fulfill obligations.
- Any guarantor may be required to enter into subsequent legal documents relating to the property (e.g. charges, deeds of variation etc).
- If there are no release conditions, a guarantor may be tied into the lease for a subsequent period of time even if their financial position or relationship with the tenant changes if the lease is not amended to replace the guarantor.
Being a guarantor under a commercial lease is a significant responsibility and it is essential for guarantors to fully understand their obligations, the implications and the terms of the lease prior to entering into a guarantee agreement.
If you require assistance with being a guarantor, please contact our Real Estate team to discuss how we can help.