4 May 2020

What about the guarantor?

The recent focus on rent holidays and renegotiating terms to ensure the solvency of the tenant once the pandemic is over has left many landlords in difficulty. First, it was made clear that forfeiture rights for non-payment of rent would be suspended. When landlords then looked at the other remedies available to them, such as the service of statutory demands or CRAR, those options too were quickly closed down. This leaves some commercial landlords questioning whether they can survive without any rental income.

Some have turned to their rent deposits and although these will provide a short term remedy, the pot is often limited to three months’ rent. Although there will be a top up obligation, that will only give limited respite if the tenant is not in a position to satisfy that obligation.

An often forgotten remedy is the recourse against the guarantor. If the lease has been running for a long time, the landlord may have forgotten that there is also a guarantor on the hook.

In a lot of cases, a landlord doesn’t even look to the guarantor because they assume that they must exhaust all of the remedies available against the tenant first. Whilst that can sometimes be a limitation, it is by no means always the case. The first port of call should be to review the obligations of the guarantor pursuant to the lease.

It is often the case that the landlord will have freedom to choose who they pursue, and that is not limited to a ‘tenant first’ recovery approach. Granted, a landlord will not have the same scope of powers available against a guarantor, but in the current climate it is unlikely that the landlord would want to forfeit the lease in any event. If they can recover the rent and service charge arrears from the guarantor and keep the tenant solvent, the lease remains live, they don’t have an empty unit and won’t have to pick up the business rates liability once the exemption period expires.

On the other hand, if you are a landlord who is agreeable to a renegotiation of the rental terms with the tenant (on a temporary or more permanent footing), do ensure in doing so that you do not inadvertently release the guarantor.

Any changes which could be construed as an ‘adverse or substantial’ variation to the terms of the lease could release the guarantor if they were not privy to the changes. Many lease variations are currently being agreed quickly and informally, so landlords do need to ensure that the guarantor is engaged and party to those changes as well, so that they avoid litigation on this point at a later date.

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About the Author
Natalie Minott, Partner

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