Leasehold Guarantees

When a landlord lets a property to a tenant its main concerns are that the rent is paid and the premises are maintained. While most solvent tenants will make sure that these things are done, if a tenant gets into financial difficulties a landlord will want to ensure that these costs are covered.

There are various types of security which a landlord may seek to put in place when a lease is granted, including rent deposits (see our separate note for more on these), bank guarantees, director guarantees and parent/group company guarantees. This note focuses on parent/group company guarantees.

ADVANTAGES AND RISKS OF GUARANTEES

A guarantee is usually an attractive option for the tenant as it does not require any upfront cash sum. From a landlord's perspective it has the advantage that the guarantee company can be required to step into the shoes of the tenant and will be liable for compliance with all lease covenants.

However, parent guarantees are only of any use if the tenant has a parent/group company of good covenant strength. The landlord generally needs to resort to its security when the tenant is in financial difficulties; one problem with a parent guarantee is that if the tenant is in financial difficulties the guarantee company may not be far behind.

From a tenant's perspective, providing a parent guarantee can be problematic if the tenant is subsequently sold out of the group: obtaining the release of parents guarantees, particularly where the tenant holds numerous properties, can complicate and delay the sale of the tenant company.

STANDARD PROVISIONS OF A GUARANTEE

The guarantee provisions are often contained in a separate schedule within the lease. The provisions will usually include the following key points:

What Is Guaranteed?

The guarantor will promise to pay the rent and also to step in and perform the tenant's covenants if the tenant fails to do so. In addition, the provisions will often specify that the guarantee extends to the tenant's obligations contained in documents other than the lease (e.g. a licence for alterations).

When Does The Guarantor's Liability End?

Unless the guarantee specifies otherwise, a guarantor will be liable throughout the term of the leases unless the tenant's own liability is released (see the section on Authorised Guarantee Agreements below). If a tenant has security of tenure and the guarantor is to remain bound during a period of holding over the guarantee provisions must state this, otherwise the...