Guarantees, Authorised Guarantee Agreements and Rent Deposits : An Overview
Guarantees, Authorised Guarantee Agreements and Rent Deposits : An Overview
Guarantees
Landlords often seek an additional covenant from a Tenant’s Guarantor as ‘principal debtor’ or ‘primary obligor’, so that the Guarantor’s liability is not merely secondary to that of the Tenant (in which case the Landlord could only pursue the Guarantor once it had exhausted all the Landlord’s remedies against the Tenant). Even with this wording, the Guarantor’s liability can never exceed that of the Tenant. The value of the guarantee to the Landlord is that the Guarantor may remain liable even if the Landlord’s claim against the Tenant is unenforceable.
The Guarantee can be dealt with by means of an appropriate provision in the Lease, or it may be dealt with as a separate document. However, a Guarantee will not be enforceable unless there is a memorandum or note of it which is:
• in writing, and
• signed by the Guarantor, or by some other person lawfully authorised by the Guarantor
A Guarantee should be executed as a Deed if there is no apparent consideration, or where it is difficult to demonstrate what the consideration is, for the granting of the Guarantee.
A Guarantee can be lost where changes are made (either expressly or by conduct) to the underlying contract. Guarantee clauses should therefore contain appropriate protective wording to avoid release in the case of:
• ‘giving time’ – e.g. the Guarantee should expressly prevent release despite ‘any time or indulgence granted by the Landlord to the Tenant, or neglect or forbearance on the part of the Landlord in enforcing the payment of rent and the other covenants in the Lease’
• variations – this is because a variation of the contract between Landlord and Tenant releases the Guarantor unless the Guarantor consents, or the variation is ‘self-evidently
insubstantial or non-prejudicial to the Guarantor’
Protective wording can preserve but not increase a Guarantor’s obligations. The Guarantor will be responsible for enhanced/augmented obligations only if the Guarantor expressly agrees to do so.
Guarantees often purport to impose joint and individual liability on several individuals under a single (composite) document. In a decided case, it was envisaged that four individuals would execute a Guarantee. In fact the signature of one of them was forged. When an action was brought under the Guarantee against one of the other signatories, the Court decided that his signature of the Guarantee was subject to a condition that it would be duly signed by all the other intended Guarantors named in it. As this had not happened, there was no liability under the Guarantee.
To try to avoid this problem, the Guarantee should include wording to confirm that each person/entity comprising the Guarantor will be bound even if any other person/entity who was intended to comprise the Guarantor has not executed the document and/or is not bound by it.
Disclaimer by a Tenant’s Liquidator or Trustee in Bankruptcy does not release the Guarantor, or the Guarantor of any former Tenant who remains liable. The Guarantor’s liability continues as though the Lease still exists.
However, future liability and any obligation to accept a new Lease end if the Landlord retakes possession of the property after disclaimer.
Authorised Guarantee Agreements
An Authorised Guarantee Agreement (‘AGA’) is a form of guarantee given by a former Tenant on an Assignment of the Lease. It is subject to the general law of Guarantees and must include protective wording to prevent release on any variation, or if the Landlord gives time or indulgence to the Assignee.
An AGA can be required if the Lease permits the Landlord to impose it as a condition of consent to Assignment, and if, in the light of the Assignee’s (lack of) covenant strength it is reasonable. If the Landlord’s consent is not required there is no opportunity to seek or obtain an AGA.
Rent Deposits
Rent Deposit Agreements should cover ‘any’ default or breach by the Tenant, and not just rent arrears.
The Tenant is usually obliged to ‘top up’ the deposit if the Landlord has made a withdrawal or if the rent increases further to a rent review.
Where the Landlord has ‘opted to tax’ (i.e. made an election to waive the exemption from charging VAT) so that VAT is payable on the rent, the deposit should be equal to the relevant period of rent, plus an amount equal to the VAT that would be payable on that rent.
(The element taken on account of VAT does not “become” VAT until it is withdrawn in connection with a taxable supply. If the Tenant’s breach is non-payment of rent the Landlord must issue a VAT invoice within 30 days of making the withdrawal)
The rent deposit “fund” will usually be held either by the Landlord as trustee, and on terms allowing the Landlord to withdraw sums in the event of the Tenant’s default or breach, or will remain as the Tenant’s money. In the latter case it may be protected by a legal charge in the Landlord’s favour.
(Charges over rent deposits created on or after 6 April 2013 do not need to be registered at Companies House. Charges over rent deposits created before 6 April 2013 did have to be registered at Companies House within 21 days of their creation, to ensure that the Landlord ranked as a secured creditor).
Repayment
Any part of the deposit not validly withdrawn by the Landlord will be repayable to the Tenant in accordance with the terms of the Rent Deposit Deed (usually at the end, or within a specified period after the end, of the tenancy, or sometimes earlier, for example on completion of a lawful Assignment of the Lease).
Rent Deposit Agreements may require the repayment of the deposit to the Tenant if, for example, the Tenant can demonstrate that it has achieved three consecutive years’ pre-tax profits of at least three times the annual rent, or compliance with other conditions. However, such early repayment provisions are less likely in a market where Lease terms are shorter and/or there is an economic downturn. In such conditions, Landlords are more likely to seek to retain deposits until the end of the term of the Lease.
For ‘new’ tenancies, (i.e. broadly those granted on or after 1st January 1996) the obligation to repay a deposit (along with the right to make withdrawals) automatically passes to the new Landlord when the Landlord’s interest is sold. The former Landlord is not automatically released from the obligation to repay, but may either:
• provide that the obligation will end when the Landlord sells its interest, or
• apply for release using the procedure available under The landlord and Tenant Act 1995
For ‘old’ tenancies (i.e. broadly those granted before 1st January 1996) there is no automatic transmission of the obligation to repay. The original Landlord remains liable and must protect itself against the possibility that a successor in title will default. This could be achieved by providing for the completion of a new Rent Deposit Agreement when the Landlord’s interest was sold, and obliging the Tenant to join in that agreement. If that was not done, liability to repay may remain with the former Landlord.
Interest on the account ordinarily forms part of the deposit and will usually be returned to the Tenant when the deposit is released.
(This article is not intended to be comprehensive or to provide specific legal advice. It should not be relied upon in the absence of specific advice given in relation to particular circumstances.)
For further information, please contact: Natalie Linehan, Andrew Williamson or David Thorp
