Many landlords will consider asking the tenant of a hospitality lease to provide a guarantor on the grant of the new lease. Guarantors offer some security to landlords in the event that the tenant doesn’t comply with the terms of the lease.
They are especially important when the tenant has poor covenant strength, for example, if the tenant is a recently incorporated limited company with no assets or the tenant is an individual starting a new business with no trading history.
This is often the case when a tenant is setting up a new restaurant, bar or other hospitality business, and the landlord is looking for ways to reduce the risk of granting a lease to a new business.
An alternative to a guarantor is for the landlord to ask for a rent deposit. However, guarantors are sometimes preferred by both parties. The tenant may find it difficult to pay a lump sum upfront if they are a new business, and it may be preferable for the landlord to have a guarantor throughout the whole term of the lease for all of the tenant’s obligations rather than being limited to the amount of a deposit.
What are Guarantors?
A guarantor of a commercial lease guarantees that the tenant will comply with the tenant’s obligations set out in the lease. If the tenant fails to comply with the tenant covenants in the lease, the landlord can ask the guarantor to perform these covenants.
Individuals or companies can be guarantors. If the tenant is a limited company, it is most common for one of the directors to be a guarantor. Alternatively, a parent or group company could act as a guarantor, although this is more unusual.
The landlord will want to ensure that the guarantor has sufficient financial strength to be able to meet their obligations as a guarantor, so they may request financial information from them.
What are the Obligations of Guarantors?
The terms of the guarantee will be negotiated between the parties’ solicitors. Some limitations can be agreed upon for the guarantor’s liability, for example, that it will only extend to a certain sum, they will only be on the hook for a certain period, or they will only guarantee non-payment of rent, but usually, the guarantee is unlimited.
The landlord can call on a guarantor to fulfil any of the covenants in the lease that the tenant has not complied with. For example, if the tenant has not paid the rent, the landlord can seek to recover the outstanding rent from the guarantor, or if the tenant leaves the property in a state of disrepair at the end of the term, the landlord could ask the guarantor to pay a sum to cover the cost of carrying out repairs to the property.
It is important that an individual who is acting as a guarantor understands the consequences of being a guarantor. It is fairly standard for guarantees to include provisions that where the lease is forfeited, or the liability of the tenant is disclaimed, the landlord can give notice to the guarantor that the guarantor must enter into a new lease with the landlord.
The lease would be on substantially the same terms as the lease with the tenant. This is quite an onerous provision and is something that guarantors will perhaps not expect that they could be obliged to do.
It is standard for the provisions to include an alternative, that the landlord can ask the guarantor to pay a lump sum equal to a certain number of month’s rent (usually six months’ rent) instead of entering into a new lease with the landlord. However, this would be at the landlord’s discretion.