It is not uncommon in commercial leases, for landlords to demand that the directors of the company or body corporate taking out the lease give personal guarantees as security for the performance by the lessee company, of its obligations under the lease agreement, specifically payment of rent and service charge.
In such scenarios, it is of paramount importance that the directors seek legal advice to get a comprehensive understanding of the extent of their liability in the event of default by the lessee company to pay rent. This could essentially minimize a director’s financial exposure.
Instances when a landlord would ask for director’s guarantees in leases include but are not limited to scenarios where a company has little or no trading history, the company’s operations are such that they fall within a high risk industry, the credit score of a company is not impressive, or in the recent case where we have experienced a pandemic that has adversely affected the economic environment.
Joint and several liability
Joint and several liabilities in guarantees apply where two or more directors execute personal guarantees. In cases where a landlord holds a guarantee executed by two or more guarantors, it is important to understand that the landlord will be able to call upon either one or all of the joint guarantors for the outstanding liabilities of the company. In fact, the landlord will not be required to exhaust all options to recover the debt against the lessee company and will usually pursue the director(s) in the most favourable financial position.
Remedies against a guarantor
An aggrieved landlord usually has a choice of remedies against a guarantor under the lease. An example would be the right to claim a one off liquidated sum equal to the outstanding rent and service charge and once this sum is recovered from a director, the guarantor’s obligation ends. The other remedy would be to require a guarantor to take a new lease of the premises for the residue of the term of the disclaimed lease.
Removal of guarantorship
There are instances where a company can negotiate for removal of the requirement for guarantorship in their lease for example where the company has been a tenant for a long period of time with the same landlord and has not previously defaulted in its obligations under the lease or if the company has a good trading history. In the alternative, a company can negotiate on the limitations of the required guarantee to the extent that the landlord can only claim on the guarantee for a certain period of time within the term of the lease or that the amount guaranteed is capped to a certain limit or that in the event of enforcement, certain properties of the director giving the guarantee will not be touched.