The role of guarantors in commercial leases: rights and liabilities

In a commercial lease, the concept of a guarantor plays a crucial role in ensuring the fulfilment of lease obligations. A guarantor can be an individual or company with capacity to guarantee the commercial tenant they will carry out their lease obligations if the tenant does not oblige with their obligations. 

The guarantor can be asked to meet the shortfall (if the payment of money is involved) or pay for the default to be rectified (or, in the worst case, be sued for damages). A landlord can ask for a guarantor in the case of a new lease or an assignment of a lease. 

Company

The company must have the capacity/power to act as a guarantor for the commercial lease. The term ‘with capacity’ is important. For example, if a company is giving a guarantee, it should have specific powers to do so under its memorandum or articles of association. The directors of a company giving a guarantee should be able to show that they are acting within their power to:

• promote their company’s success
   
• promote the tenant’s success, and 
   
• that the company constitution has correctly approved it.

Individual

If a guarantor is an individual, they will take on personal liability for the obligations under the lease if the guarantee is called upon. This is because an individual does not have the limited liability that a limited liability company has. 

It is important to note that when entering into a guarantee, all of their personal assets are at risk if the tenant defaults. A landlord will wish to ensure the individual has sufficient financial standing to meet its liabilities. A third-party guarantee can provide security in such circumstances.

Limits

A guarantee is a secondary liability, which means that it is linked to the principal liability given by the tenant directly to the landlord. This means that:

• The guarantee will only be valid if it is in writing and signed by the guarantor (or someone authorised on its behalf).
   
• A claim can be brought under a deed within 12 years (known as the limitation period). However, if the claim is for rent arrears, the limitation period is six years from the date the rent became due. This means that if an amount claimed by a landlord from a guarantor relates to rent under a lease, the limitation period will also be six years.
   
• The guarantor must be served a formal notice within six months (or any variation stated in the lease) of the date when the money fell due.
   
• As a guarantee is linked to the tenant’s obligations in the lease, if the lease is unenforceable in any respect or if, for any reason, the tenant is found not to be liable, then the guarantor will not be liable either.

Guarantees are subject to strict formalities. If a guarantee is in place, the landlord should always proceed with care to ensure that it is not caught out.

A variation of a lease will release the guarantor unless either:

• The guarantor consented to the variation, or
   
• The variation is clearly insubstantial or incapable of adversely affecting the guarantor. 

This means the guarantor has a right to any variations of the lease.

Authorised guarantee agreement (AGA)

An AGA is an agreement which places an obligation on an outgoing tenant to guarantee the performance of the tenant covenants contained in the lease by the new tenant (assignee). 

If the assignee fails to perform the tenant covenants in the lease, the AGA allows the landlord to pursue the outgoing tenant under the terms of the agreement. An AGA may be given only by an assigning tenant and only if it is required as a condition for giving consent to the assignment. 

An AGA also provides the landlord with the option to insist on the outgoing tenant taking on a new lease (on the same terms as the existing lease) if the new tenant defaults and the existing lease is disclaimed.

Commonly, an AGA lasts from the date the outgoing tenant sells their interest in the lease to the assignee until that assignee has validly disposed of their interest in the lease to a third party or until the term of the lease comes to an end (whichever circumstance happens first). 

Breach

If a tenant has defaulted on their obligations to pay rent and the landlord, having called in the guarantee, finds that the guarantor also fails to pay the rent, then the landlord may wish to take the following steps against the guarantor:

• Commencing legal proceedings for the arrears may force either the tenant or the guarantor to pay the arrears.
   
• Serving a statutory demand (winding up or bankruptcy proceedings) may also have the same effect.
   
• Commencing a bankruptcy or winding up petition may or may not result in a payment to creditors, of which the landlord will be one, although probably not of the full amount of the debt.

Contact our commercial lease solicitors

Understanding the role of guarantors in commercial leases is crucial for both landlords and tenants. As guarantors assume significant financial responsibility, it is vital to identify the legal obligations to ensure formalities have been complied with and to consider the potential implications of lease variations. 

Our commercial lease solicitors are available to guide you through the process. Every business has unique needs, so we offer tailored advice that aligns with your objectives. 

With offices in Brighton, London, East Sussex, and Cumbria, we assist commercial landlords and tenants nationwide.