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Some landlord’s will insist on a third party guarantee to be given for a lease.  This is commonly the case where the tenant will be company, particularly with limited trading history and financial record who are unable to demonstrate to the Landlord that they will be a reliable and financially stable tenant.   Company directors are often called upon to stand as guarantor for compliance of lease obligations.

Such guarantees should not be entered into lightly as they can be very onerous.  The first question should be- is a personal guarantee really necessary; can the company provide adequate security?

Director’s guarantees impose a personal liability, which, in essence, defeats one of the main benefits of a tenant being a company, enjoying limited liability status. By signing such a guarantee a company director will be putting their personal assets at risk, including, for instance, their family home. If the tenant company goes insolvent and cannot comply with the Lease obligations this could also force the guarantor into personal bankruptcy.

If a director is asked to sign a guarantee it is important that they fully understand their obligations under the Lease.  Some leases allow changes to be made to the Lease without guarantor approval and if so, effectively, can make a guarantor personally liable for new terms, which the guarantor may not know anything about.  Further, the usual position is that if several directors give a personal guarantee (or give a single guarantee jointly and severally) the Landlord does not have to take action against all of them but can claim the whole amount from one guarantor.

As an alternative to a personal guarantee, a tenant could offer a set rent deposit (often much preferable to a guarantee). However, rent deposits typically tend to be between 3-12 months rent (depending on, for instance, the property and the length of the lease) therefore a tenant may not want, or be able, to pay this at the outset, from a cash flow perspective.

If a Landlord will only accept a personal guarantee then there may be scope for negotiating a limit on the guarantee, for instance, that it will only apply during the first half of the lease term, provided that the tenant meets certain obligations, such as making timely rent payments.  It may also be possible for a tenant to exclude their home from the guarantee.