Question: I am in the process of leasing my commercial property to a new tenant. Is it advisable to obtain a personal guarantee if the tenant is trading through a limited company?
Answer – A landlord’s main commercial consideration in granting a lease is whether the tenant has the means to pay the rent for the duration of the tenancy.
As tenants will often enter into a lease through a limited liability company, it is advisable that the landlord obtains a personal guarantee from the promoters of the limited liability company. The purpose of a personal guarantee is to minimise the risk of the tenant failing to pay the agreed rent or otherwise breaching the terms of the lease.
If the tenant defaults on the terms of the lease, the first step for the landlord will be to review the express terms of the personal guarantee, to see what options are provided for. The landlord is likely to be focussed on recovering the property and recovering the rent arrears.
The ability of the guarantor to pay arrears and perform the obligations under the lease will be critical in the consideration of the enforcement options and ultimately to recovery of any arrears and losses.
The existence of a personal guarantee will increase the landlord’s options in dealing with the arrears. However, the landlord will need to assess whether the guarantor has the means at that time to pay the rent and is worth pursuing in an action for recovery of arrears. If the guarantor does not have the means at that time to pay the rent, it may not be worth pursuing the guarantor and the landlord will instead have to focus on recovering the property i.e. agreed surrender or forfeiture of the lease.
As enforcement may be costly, the real practical benefit of the personal guarantee is in bringing the guarantor to the table to negotiate a surrender of the lease and settlement of liabilities and thereby achieving the landlord’s objectives of recovery of possession and arrears and losses, to the extent possible.
Personal guarantees do not eliminate the normal risk inherent in a landlord and tenant relationship, but they do have a clear benefit in offering options in difficult circumstances. They can also place significant and potentially very onerous obligations on guarantors which need to be carefully considered.