Written by: Steven Jones on Tuesday 08/03/2016
What is a Deed of Guarantee and can the terms be negotiated?
When taking on a commercial lease, a tenant may be asked for a Deed of Guarantee from the landlord. We look at what this is, what it means for both parties and whether its terms can be negotiated.
What is a Deed of Guarantee?
A Deed of Guarantee (DoG) is a legal document which states that person or company “A” agrees to be responsible for person “B”’s commercial rent if person “B” is unable to pay it. It’s customary for a landlord to request a DoG if a tenant is signing a lease in the name of a relatively new company or if they have a poor credit history. It can be additional to a rent deposit and provides an extra layer of financial security for the landlord.
Benefits for the landlord
It’s estimated that 55% of new small and medium sized enterprises (SMEs) fail within their first five years. The reasons for this high rate of failure include high rates of tax, the unwillingness of banks to lend to SMEs, an over-bureaucratic system, the costs involved in running a business, and delayed payments from clients. Clearly, as a landlord, while you may have full sympathy with a tenant who finds him or herself in financial difficulty, you too are running a commercial enterprise and rely on regular and agreed payments in order to fulfil your own obligations.
A DoG is a straightforward legal agreement which will last for the entire duration of the lease. Landlords should only sign it after a credit and reference check has taken place on the guarantor, who – in the case of a commercial lease – is usually a director of either the tenant’s company or its parent company. The document sets out the agreement that the guarantor will be responsible for any rent due and that they will also compensate the landlord for any losses which are deemed to be a breach of the terms of the tenant’s lease. Other clauses may include an agreement by the guarantor that, in the event of the tenant company’s liquidation, they are prepared to take on a new lease from the landlord.
Benefits for the tenant
Business start-ups can be stressful, expensive and hazardous and no-one ever sets out to fail. If a tenant is taking on a new commercial lease, it can be reassuring that an already-established business is there to fulfil their financial obligations in case of failure, or that there is a personal guarantor who is financially sound enough to cover their liabilities.
One major point of negotiation between a landlord and a guarantor is the automatic release clause, which states that a guarantor will be automatically released from their obligations if the terms of the lease are substantially varied, unless they have consented to this beforehand. It is, therefore, in the landlord’s best interests to involve the guarantor in any negotiations about varying the lease terms before the lease is signed.
Another negotiating point is the amount of time a tenant has to find a new guarantor, in case the original one either becomes ill or dies, or becomes insolvent. In this case, a reasonable period of time may be allocated to find a new guarantor – this time period is usually two months but a longer time can be negotiated and written into the agreement. The new guarantor will also have to meet the landlord’s criteria of financial solvency and will have to agree to credit and reference checks.
Safety and security
It is the guarantor’s responsibility to familiarise themselves with the precise terms of the lease agreement between the landlord and the potential tenant. A copy of the lease should be sent to the guarantor before signing so that they can seek legal advice.
In order to prevent fraudulent and possibly criminal behaviour, is also important that the guarantor signs the DoG in person and that it is witnessed by a professional, independent person. This safety precaution prevents forged signatures which would render the document invalid.
This belt-and-braces approach to liability is a sensible financial approach which both landlords and tenants find beneficial. As with all legal documents, particularly those relating to commercial leases, independent, impartial advice should be sought before any documents are signed. If you’re a landlord or a tenant and you need professional advice on any aspect of Deeds of Guarantee, talk to the Eddisons team in confidence.
Clearly, as a landlord, while you may have full sympathy with a tenant who finds him or herself in financial difficulty, you too are running a commercial enterprise and rely on regular and agreed payments in order to fulfil your own obligations.