A lease guarantor is a formal agreement signed by the landlord, the tenant and, in addition, a third party who fulfils the landlord's monetary requirements. A lease guarantor serves as a financial intermediary and is liable for the tenant's defaults, which protects the tenant from eviction. The personal guarantee of the lease is a crucial feature of many commercial real estate leases. A lease guarantee is a separate contract under which a third party guarantor undertakes to perform the tenant's obligations to the landlord.
Landlords understandably want to ensure that their tenants - whether individuals or commercial entities - have the financial means to meet the obligations set out in the lease. If a Tenant without sufficient assets breaches its lease by leaving the property early, refusing to pay rent or causing damage to the space, the Landlord will not be able to recover its damages. The Landlord may have nothing to recover against. For this reason, if the landlord is unsure of a prospective tenant's creditworthiness, it will often require the tenant to provide security from a person or entity that has sufficient assets to guarantee the tenant's obligations.
If the Tenant fails to pay rent, the Landlord can recover the arrears from the guarantor, usually before seeking damages from the Tenant. Depending on the scope of the rental guarantee, the guarantor may also be financially liable for damages caused by the tenant to the rental premises. In the case of a lessee entity (i.e. a corporation, limited liability company or partnership), the guarantor is usually one of the entity's principal individual owners or a corporate subsidiary.
In the case of individual tenants, the guarantor is usually a family member or investor. A guarantor acts as a guarantee that the rent is paid during a situation where the tenant is unable to meet its financial commitment. The guarantor is as responsible for the contract as the tenant. That is why it is so important to make sure that everyone understands and accepts the terms and conditions.
The lease guarantee is a valuable tool that provides commercial landlords with additional security. This is especially true in the case of leasing to a corporate tenant without substantial assets or an established operating history. A "personal guarantee" requires the personal guarantor (usually a director or directors of the corporate tenant) to put his or her personal assets at stake in the event that the corporate tenant goes bankrupt or defaults on the lease. A "corporate guarantee" is usually signed by a parent company or a more developed affiliated company.
It is a comfort to the landlord to have an additional set of assets to fall back on in case the tenant defaults. It also follows that a guarantor is less likely to allow the corporate tenant to default, make risky business decisions or allow the leased space to be destabilised if it knows that doing so will make the guarantor personally liable. For example, the landlord may be required to "mitigate its damages by leasing the leased space to a new tenant as soon as possible". The traditional version of the lease guarantee is a blanket guarantee whereby the guarantor undertakes to perform all of the tenant's obligations under the lease for the entire term of the lease and, potentially, during lease renewals and amendments.
Other options are to seek a subletting situation or to find flatmates who do not require you to sign a lease. For example, the parties to a ten-year lease may agree that the tenant's principal is to guarantee five years of fixed rent (scope) to be paid under the lease. Otherwise, if no fixed numerical limit for the liability is set, a court may subsequently misinterpret the amount of liability under the guarantee. The first question to be addressed in the warranty negotiations, even if only implicitly, is whether the warranty is fully justified for the purpose of protecting the respective interests of the parties to the lease.
At a minimum, if the landlord persists, perhaps the guarantee can provide that, in the event of the tenant's default, the landlord and not the guarantor will perform these obligations where possible, but that the guarantor will be responsible for the cost of such performance. In other words, if a business fails to pay rent under a commercial lease, the landlord wants to have someone to collect rent from other than the business entity itself. Investing time in negotiating a commercial lease that includes provisions that mitigate liability under any personal guarantees makes good sense for businesses, and for landlords. If a tenant decides to sublet his or her flat to another person, the original guarantor remains liable for the rent and subsequent lease renewals.
In an effort to protect themselves from such manoeuvres, landlords have become accustomed to requiring some form of personal (or corporate) guarantee covering the tenant's obligations contained in the underlying lease. A limited warranty falls short of guaranteeing all of the underlying tenant's obligations in the lease. First, the landlord can include clear language in the lease guarantee stating that the guarantor's obligations will extend to any rent increase, lease term extension, renewal or other modification of the lease. More importantly, such a broad warranty will also require the guarantor to physically perform any non-monetary obligations of the lessee, such as the performance of any improvements or alterations to the premises for which the lessee is responsible, covenants requiring the lessee to open the business by a specific date and operate continuously, and removal and restoration obligations at the end of the term, to name a few.