With the threat of the removal of the Section 21 eviction process, now more than ever it makes a lot of sense to take extra precautions when letting a property.
Taking a guarantor or rent guarantee insurance are two 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.
There are a number of reasons why a landlord may consider asking for a guarantor when renting out a property. Traditionally, guarantors are almost universally used for student house lets. Students have no credit history, so it makes sense for student landlords to ask their parents to act as guarantors.
There are some very good reasons for doing so, sometimes it can be fo tenants who are:
The guarantor is an alternative to a rent guarantee insurance policy but more comprehensive in what it covers. 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 often directors are required to act as sureties. This especially true for a new business with few assets and no goodwill.
In either case, residential or commercial, 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 for your guarantors.
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 intimately the tenant concerned, therefore there's a high degree of trust.
On the other side of this, most tenancies go smoothly, the guarantor is not called upon and the tenant pays up on time and causes no problems at all.
For a rent guarantor there are a few things to bear in mind. With claims against guarantors on the rise in 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 usually will have to be a homeowner. They will be asked various questions with checks to back-up all of this up, such as providing employer details, national insurance number, bank details and full contact details.
A background check will be carried out on all of these things before acceptance as a guarantor. A check on credit history and references may be required.
Guarantors would be well advised to get some advice before signing anything, and make sure they check the following:
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 is forced to take over the tenancy in order to be able to cancel it. So, with a commercial lease the guarantor obligations can stretch out for years.
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's losses, expenses or damages where the tenant fails to carry out his of her full obligations under the lease.
With residential tenancies it is now quite 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:
Similar factors apply here, as with residential lettings, but commercial lettings, as has been said above, usually include 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 will usually need to be required to be a homeowner with steady long-term employment, or having the financial resources to cover any claims.
Parents of young people or students will often be asked to guarantee their son's or daughter's rent and other tenancy obligations. This, hopefully, is less risky for the parent, as they can judge if 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 ask to limit (in the guarantor agreement) their obligations to those of their relative alone.
The guarantor's application form is similar to the tenancy application. Credit searches and references will be checked and all of the following:
The second part is the guarantor's agreement with the landlord. This states:
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.
Questions to clarify: 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 its losses.
For example, they 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 be expected to carry on paying.
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 to maintain the integrity of the guarantor agreement that landlords communicate to guarantors about any and all changes in the tenancy, without delays. Any lapses in rent payments as soon as they occur, all missed rent payments or damage issues which arise and anything that may result in a claim on the guarantor.
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. That's because there's no consideration involved in this type of contract (no monetary payment).
The guarantor agreement may be a separate document or the guarantor could be made a party to the tenancy agreement (contract or lease).
It is recommended that any landlord setting-up a guarantor arrangement seek legal advice from an experienced property specialist solicitor.
If you have any questions about any of the issues discussed here, post your questions to the LandlordZONE Forums These are some of the busiest Rental Property Forums in the UK - you will have an answer in no time at all.
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