In brief - Make sure you manage the risk of providing a lease guarantee
The risk of guaranteeing a lease can be mitigated by offering alternative forms of security, limiting your guarantee, understanding what you are guaranteeing and entering into a side deed with the tenant.
Guarantor responsible for all tenant obligations under the lease
While a personal or corporate guarantee represents security, comfort and assurance for a landlord, conversely, it means obligation, risk and liability for a guarantor. However, although it may appear that giver and recipient sit on opposite ends of the spectrum, a guarantee can be a mutually acceptable outcome for all parties, provided that as a guarantor you understand the risk and manage it to an acceptable level.
Under most lease guarantee clauses, a guarantor agrees to guarantee all of the obligations of the tenant under the lease. These obligations can extend beyond the payment of rent during the lease term to such things as the cost of making good damage to the premises, or upon default by the tenant and early termination of lease, the loss suffered by the landlord in reinstating and re-letting the premises, the cost of the reduction in rent if the premises are re-let on terms less advantageous to the landlord and legal costs in connection with tenant default.
Importantly, as distinct from a limited liability company where, generally speaking, the debts of the company are not the debts of its directors, any assets owned by a guarantor may be claimed under the guarantee.
Here are some points to consider before agreeing to guarantee a lease.
Offer alternative forms of security
A cash security deposit or bank guarantee is less risky than providing a personal guarantee. Although the tenant will have to provide an upfront amount (usually an amount equal to between three and six months of rent with or without outgoings), that amount is fixed and known, whereas a personal guarantee is an unknown quantity and potentially unlimited depending on the terms of the lease.
Most commercial terms are negotiable and a landlord may even accept a slightly higher rental in return for no cash security deposit, bank or personal guarantee. A cash security deposit or bank guarantee alone is a commonly accepted and sufficient form of security.
Limit your guarantee
If the landlord insists on having a personal guarantee, negotiate limits on that guarantee. It may be reasonable to offer a conditional guarantee such as one of the following:
- a guarantee of a fixed amount agreed between the parties; or
- a guarantee that expires after a certain time period (it should be a reasonable period to allow the landlord an opportunity to reasonably assess whether the tenant is likely to default under the lease); or
- a guarantee limited to an amount of rent after a set period of time following default by the tenant or early termination of the lease. For example, an amount equal to six or twelve months' rent after default or termination may offer the landlord enough comfort that it will be adequately covered for its costs, including over those months when the premises may be empty pending marketing, reinstating and re-letting the premises.
Understand what you are guaranteeing
Have a lawyer review the lease and explain what your obligations are as guarantor.
Understand what is at risk and what you may lose.
Enter into a side deed with the tenant
If the guarantor is independent of the tenant e.g. not a director of the tenant company, request that the tenant enter into a side deed with you as guarantor. The benefit of this is, unlike under the lease where all of the obligations of the tenant are owed to the landlord, the tenant will owe certain obligations to you as guarantor. If there is any breach by the tenant of those obligations, you will have an action in damages against the tenant.
For example, you may consider documenting in a side deed requirements as to what events under the lease will require the guarantor's consent e.g. exercise of any option during the lease term; and when and how the tenant must notify you during the term of lease e.g. on carrying out works to the premises.
The side deed may also include an indemnity to cover all loss and liability suffered by you as guarantor and/or a power of attorney provision in respect of your right to be appointed as attorney of the tenant to effect certain obligations not fulfilled by the tenant.
This is commentary published by Colin Biggers & Paisley for general information purposes only. This should not be relied on as specific advice. You should seek your own legal and other advice for any question, or for any specific situation or proposal, before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories. © Colin Biggers & Paisley, Australia 2020.