Now more than ever, in a cost of living crisis, it makes sense to take extra precautions when letting a property. Taking a guarantor or rent guarantee insurance are great ways to protect yourself against rent arrears and other issues in a tenancy.
This is a comprehensive article outlining what both landlords and tenants should look out for when entering into a guarantor arrangement.
Why have a guarantor?
There are a number of reasons why a landlord may ask for a guarantor when renting a property to someone. Traditionally it’s done for students or young people with no credit history, but more and more landlords as asking for guarantors today as a matter of policy.
There are some very good reasons for doing so, sometimes it can be for:
The tenant has a poor credit score due to debts, court orders or bankruptcy They are on low income or have just started a new job They have moved about a lot in the past few years or have lived abroad They are unable to provide a reference from a previous landlord Or simply to give landlords some peace of mind The guarantor is an alternative to a rent guarantee insurance policy. It is a safeguard against the tenant defaulting on payments or refusing to pay for damages caused whilst in that property.
With commercial tenancies it is common practice to require a guarantor, especially if the tenant is a company where directors are required to act as sureties, and especially for a new business with few assets and no goodwill.
In either case it is essential for guarantors to be comprehensively credit checked and referenced just as you would do for any new tenant, you also do the same checks on your guarantors.
Guarantors take a risk
There is no doubt about it, being a guarantor is high risk. The worst case scenario for a guarantor is that they have to pay off someone else’s debts. Many guarantors don’t realise just how much risk they are taking on, but usually it’s parents and relatives who act as guarantors and they know the tenant concerned, therefore there’s a high degree of trust.
On the other side, most tenancies go smoothly, the guarantor is not called on and the tenant pays up on time and causes no problems at all.
Advice for guarantors
For a rent guarantor there are a few things to bear in mind. With claims against guarantors on the rise in these straightened times the prerequisites for standing surety are becoming more strict.
The guarantor will need to show their income is over a certain amount and quite often will have to be a home owner. They will be asked various questions with checks to back all of this up such as employer details, national insurance number, bank details and contact details.
A background check will be done on all of these things before they will be accepted as the guarantor. It is important to note that the process can be time consuming. A check on credit history and references may be required, depending on the landlord or agency carrying out the checks.
Guarantors would be well advised to get some advice before signing anything and make sure they check the following:
Who they are responsible for in the tenancy? How much are you liable for? How long they are expected to act for? How soon they will be notified if there are problems? What course of action will the landlord take if there are breaches of the contract ? There’s no standard contract
There is no standard form (contract) or statutory agreement for guarantors so the exact wording will be strictly enforced by the courts if it should it come to that.
In commercial tenancies it may transpire that the guarantor be forced to sue the tenant for damages and take over their tenancy in order to be able to cancel it.
With a commercial lease the guarantor obligations can stretch out for years.
Advice for landlords
Enforcing a guarantee agreement is not straightforward and depends on following strict legal procedures. This article is general guidance only and should not be relied upon when making or not making decisions: always seek professional advice when setting up a guarantor arrangement.
The guarantor is the landlord’s insurance policy against tenant default. The guarantor pays the landlord the rent if the tenant defaults, it pays the landlord all losses, expenses or damages where the tenant fails to carry out his of her full obligations under the lease.
With residential tenancies it now quite is common for the landlord or agent to ask for a guarantor, particularly when a tenant has a low credit score. There are many reasons why a tenant may have a low credit score when credit checks are carried out. These include:
Never having borrowed money or used credit cards No fixed address and/or not listed on the electoral role Lived at current address less than 6 months Lived abroad and returned to home country Worked for less than 6 months Student or job with low earnings History of debts, late payments or Count Court Judgements (CCJs) With commercial tenancies it is very common for a guarantor to be required. Similar reasons apply here as with residential lettings, but commercial lettings, as has been said, usually includes asking directors of companies to act as guarantors where the tenant is a limited company, this being particularly important with new businesses.
One alternative to having a guarantor with a commercial tenancy is to have the person who is willing to act as guarantor become a joint tenant on the lease. It is very likely that with a company, especially if it is newly formed, with few assets, the lease will be in the directors’ names as tenants, not in the company name.
The guarantor would usually need to be a home owner with steady long-term employment if he or she is to satisfy the requirements of a good guarantor.
Parents of young people or students are often asked to guarantee their son’s or daughter’s rent and other tenancy obligations. This, hopefully, is less risky for the parent, as they know that their relative can be trusted?
However, parents need to be cautious here because joint residential tenancies for students or groups usually carry joint and several liability – this means that the parent is, in effect, guaranteeing all the other residents as well, not just their child! It has become more common of late for parents to limit (in the guarantor agreement) their obligations to those of their relative alone.
A guarantor will be required to do these things:
Complete a Guarantor’s Application form Sign a Guarantor’s Agreement The guarantor’s application form is similar to the tenancy application. Credit searches and references will be checked and all of the following:
The individual’s identity The property to be let Guarantor’s personal details Residency information, including home ownership at the Land Registry Legal history and any CCJ’s Employment history Accountants, solicitors, character referee Bank and trade references for businesses Declaration allowing credit search & signature The second part is the guarantor’s agreement with the landlord. This states:
The date of the agreement The term to which it applies, when and how the obligation ends The signatures and names of the parties to the agreement The property The names of the tenant/s Points to watch:
The wording of the Guarantor Agreement is crucial. This is a legal contract and will be strictly enforced by the courts according to how it is worded – there is no standard form or statutory Guarantor Agreement.
Is the agreement confined to the original lease term, or will the obligation continue into subsequent terms or a periodic tenancy? Both parties need to be clear on this.
If the agreement states that the guarantor is a primary obligator the guarantor will be obliged to carry on paying until the end of the term certain, or when the tenant leaves if the tenancy has become a periodic one.
On the other hand, should the agreement state that the guarantor indemnifies the landlord against losses due to the tenant’s default or failure to observe the agreement terms, then the landlord is obliged to minimise her losses.
For example, she may be expected to use possession proceedings to remove the tenant or re-let as soon as possible if the tenant leaves within the tenancy term certain leaving the guarantor to pay his remaining rent. However, the guarantee agreement may state that the landlord is not obliged to minimise his losses, in which case the landlord could sue, and the guarantor would have to keep on paying.
In extreme cases the guarantor may be forced to sue the tenant for damages and apply to take over his tenancy, thus making it possible for her to terminate the tenancy agreement.
Particular care needs to be taken by guarantors of commercial leases where obligations can be for many years. Here, guarantors could find themselves guaranteeing the lease of a failed business, or where the tenant has varied the lease terms to the detriment of the guarantor.
Guarantors can therefore find themselves completely taking over the obligations of the original tenant, taking on more onerous terms or continuing to underwrite the lease for subsequent tenants.
Varying a commercial property lease and its effect on a guarantor: landlords and tenants should seek the agreement of any guarantors to any proposed changes to the terms of the lease, even minor changes which could increase the guarantor’s liability.
It is very important that landlords communicate to guarantors any and all changes in the tenancy, lapses in rent payments as soon as they occur, all missed rent payments or damage issues which arise and which may result in a claim.
In commercial tenancies holding former tenants and their guarantors liable means that in a commercial lease, where previous tenants or their guarantors are still held liable to a landlord for default by the current tenant, landlords should at all times keep everyone in the picture, notifying them before the current tenant accumulates excessive liabilities.
Assignors who have ongoing liabilities under a commercial tenancy guarantee should be kept in touch and the landlord should provide all the necessary information.
Guarantors and Assignors should take professional advice on what methods are open to them to minimise their losses created by tenant defaults.
Landlords should be aware that a separate guarantor agreement needs to be signed as a deed and witnessed, as there’s no consideration involved in this type of contract, otherwise the guarantor should be made a party to the tenancy agreement (contract) – seek legal advice on this as it is being constructed, because if you get it wrong the agreement with the guarantor is not enforceable.
If you have any questions about any of the issues here, post your question to the LandlordZONE® Forums – these are the busiest Rental Property Forums in the UK – you will have an answer in no time at all.
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