Guarantor! Who What, Why and When!

If you fail your credit check we need a guarantor in order to take the application forward. 247 will not take any application forward with a failed credit check without guarantor. 

Rent Guarantees

Definition: 

A rent guarantee (sometimes called a surety) is a secondary contract in which one person, X (the guarantor), promises to repay to another, Y, a debt or perform the obligations given by a third person, Z (in this case, the tenant), who is the principal debtor and the person primarily liable for the debt. In the context of residential lettings, the primary contract will, of course, be the tenancy agreement. The guarantee may work in a number of different ways; one guarantor may offer to provide a guarantee for several tenants. Equally, there may be one or more guarantors for each tenant which adds some complication in the case of joint tenancies.

Usage: 

A surety or rent guarantee is generally used whenever the tenant's ability to pay the rent is in question. Typical cases will be where the tenant is:

• A company. In this case, the director or, if the company is a subsidiary of a large and financially sound company, the parent company should be required to act as surety. Note that, where the tenant is a private company, a surety should always be sought.
• A student or unemployed person. Such persons have no current earnings and often little in the way of previous earnings history to rely upon. Often they have a poor financial status and this is a classic situation where a surety would be appropriate.
• A divorced or separated spouse. Where the separated person is solely dependent on maintenance payments for income, the 'paying' spouse or ex-spouse should be required as surety.
• A self-employed person. Self-employed persons can represent a higher risk for the landlord for two main reasons. Firstly, their earnings, by definition, often fluctuate from month to month and may be difficult to verify or predict accurately. Secondly, attachment of earnings orders, which can be applied by the courts, to debts owed by persons in employment, cannot be used where a person is not employed.
• A bankrupt, or other situations where financial references are unsatisfactory (e.g. County court judgements - CCJ registered against them). A guarantee will avert risk where, despite previous financial problems, the landlord or agent considers the prospective tenant to be bona fide, and good for the tenancy.

The Law of Guarantees:

In Writing
As for contracts for the sale or lease of land, contracts of guarantee are required to be in writing (Statute of Frauds, 1677). Thus a verbal agreement to provide a rent guarantee will be unenforceable. The words of the guarantee should be unambiguous, and make it clear exactly what payments and obligations are being guaranteed. Another common mistake is that the guarantee simply undertakes only to meet any shortfall in the rent payments. Ideally, the guarantor agreement should also be drafted so as to cover not just the obligation to pay rent, but all the tenant’s covenants and obligations under the tenancy agreement.

Expiry
A surety will prima facie be construed as continuing only for as long as the obligation being guaranteed subsists. In the context of a guarantee on a residential tenancy, this means that, unless the rent guarantee agreement provides otherwise, the guarantor's liability will normally only apply specifically to the (contractual) fixed term and not to any statutory extension, or to any period where the tenant simply holds over paying rent. Thus where it is unclear, the court will lean in favour of construing the guarantee as a specific rather than a continuing one.

Effect of variations
Where the terms of the primary contract are subject to variation, the basic rule is that a guarantor is released from liability by any change in the principal contract between the landlord and the tenant, unless the guarantor expressly agrees to the variation.
However if the lease includes a rent review provision the guarantor is liable to pay the increased rent, following the review in accordance with the review position without being joined as a party in the review process.

Joint tenancies
the landlord will wish to obtain a surety for each individual tenant. Guarantors are generally cautious when asked to sign a rent guarantee for a joint tenancy due to the problem that the obligations of joint tenants are normally deemed to be joint and several yet the guarantor only wishes to guarantee part of any debt or claim for damages that applies to his/her principal (i.e. one of the specific individual tenants) under the joint tenancy.

This means that, under a general rent guarantee agreement, the guarantor could become liable not only for the subject tenant, but for any default of any of the other joint tenants in the property.

The prudent guarantor will not normally wish to extend his liability beyond the specified individual tenant. By the inclusion of appropriate wording it is possible to agree to limit the liability of the guarantor, either to a specified financial limit, or by limiting the guarantee purely to any liability attaching directly the individual tenant, thus excluding, for example, any liability due to rent arrears or damage attributable to any of the other joint tenants.

Guarantor Agreement: 

A guarantee can be provided by inclusion of relevant clauses within the tenancy agreement, or alternatively, drafted by way of a separate written agreement or deed of guarantee. Both methods are equally valid, although in the writer's opinion, the use of a separate agreement is preferable, reflecting the fact that the guarantee is a separate agreement in its own right, and continues to exist (if appropriately drafted) even though the initial tenancy agreement has come to an end, or been replaced or extended by a new tenancy.

Standard agreements can be obtained from suppliers of legal forms, or individually drafted by a solicitor. A guarantee should contain the following:

• An agreement that makes the guarantor liable not only for rent arrears but for any of the tenant's obligations under the tenancy agreement.
• An agreement that the guarantee will continue whilst the tenant resides in the property. A guarantee will prima facie be construed as applying only to the (contractual) fixed term and not to any statutory extension, or to any period where the tenant simply holds over paying rent. Any agreement should, therefore, be drafted to provide for the continuance of liability under any extension or renewal.
• A term which prevents the discharge of the surety by any forbearance or neglect on the part of the landlord or the giving of time.
• A term whereby the estate of the guarantor becomes liable should the guarantor die during the currency of the agreement.

Needless to say, it is vitally important that the agreement is correctly drafted. Moreover, care must be taken to ensure compliance with the Unfair Terms in Consumer Contracts Regulations 1994. There is a steadily growing quantity of guidance and case law in this area to assist practitioners.

Primary Contract: 

The effect of the guarantor agreement will be to bind the guarantor to underwrite the debt and obligations of the principal (the tenant) in the primary contract – i.e. the tenancy agreement. It is a sound legal principle that people cannot be bound by contractual terms they have had no opportunity to see, and it is therefore essential that the guarantor is given a copy of the tenancy agreement that the landlord proposes to grant to the tenant.

Ideally, both the guarantor agreement and the tenancy agreement should have been supplied to the guarantor in advance of signing (see ‘Setting up the rent guarantee agreement’ overleaf) in order that they have the opportunity to carefully read the documents and take advice.

Choice of Guarantor: 

In most circumstances, where there are genuine reasons why the tenant is not able to provide satisfactory references, it should be possible to find a friend or relative who is willing to act as a guarantor. Clearly, this should be a person who is of sound financial standing with a good credit history. The guarantor should have the means to be able to afford the monthly rental payment if the tenant defaults, whether out of his or her current income or from savings. For example, in the case of a retired person, it is more likely that savings rather than income would provide the required security. It would also be necessary to check that the guarantor has sufficient realisable assets to cover any likely claim under the guarantee. This usually is in the form of savings deposits and such like.

Similar credit checks and references should be taken on the guarantor as would normally be taken for a tenant in order to establish the guarantor's financial status. Clearly, where there are joint guarantors, it will be necessary to carry out a credit check on each for the respective amount.

Enforcement issues also apply to the choice of guarantor. Bear in mind that it may be necessary to bring court proceedings against them to force payment. A self-employed person with few significant assets can more easily evade his debts than an employed person. This is because, where a person is employed, a debtor may ask the court to make an attachment of earnings order on their employer. Similarly, where a person owns a house, the debtor can ask the court to put a legal charge against the property, effectively giving more security.

Setting up the rent guarantee agreement: 

It is good practice to send the guarantor copies of the relevant tenancy agreement and guarantor agreement prior to signing, along with a letter confirming that he/she has been asked to stand as guarantor for a specified tenant and an explanation of the financial implications of providing such a guarantee. The reasons for this are firstly that the guarantor should be given time to peruse the document, understand the commitment and take advice. Secondly, it provides a means of verifying both the validity of the proposed guarantor and the guarantor's address.

Signing: 

The guarantee should be signed either prior to or at the same time as the tenancy agreement, but preferably not after. In either case, a copy of the tenancy agreement should ideally be attached to the guarantee, so that the guarantor is aware of the obligations he is guaranteeing. Extreme care should be taken where it is not possible to meet the guarantor in person. The opportunity for fraud is substantial and the practitioner should take great care to verify that the person is who he says he is. Copies of bank statements addressed and sent to the person concerned are valuable in such cases, as are credit checks which incorporate a search of the electoral role.

A copy of the tenancy agreement should be annexed to the guarantor agreement and initialled by the guarantor, as evidence that the guarantor has seen both documents. Copies of both documents should be supplied to both parties.

Extension or renewal of tenancy: 

Renewal or extension of the tenancy agreement does not automatically extend the rent guarantee; the guarantor’s liability will normally only apply to the initial fixed term of the tenancy, and not to any contractual or statutory extension of the tenancy.

It is therefore essential to obtain written permission of the guarantor before granting any contractual extension to the tenancy agreement. Each time the tenancy is extended or renewed, best practice requires that the guarantor is informed of the extension to the tenancy and, if appropriate, asked to sign a new rent guarantee. However, in many cases, this problem may be more theoretical than real. If the occupier has proved to be a good tenant and reliable in paying his rent, then it may not be necessary to extend the rent guarantee.

Unfair Terms in Consumer Contracts Regulations 1999: 

The Unfair Terms in Consumer Contracts Regulations 1999 apply a test of fairness to most standard terms in consumer agreements. The Regulations state that any terms that fail this test and are declared to be unfair will not be binding, with the exception of the ‘core’ terms of the agreement and terms which are individually negotiated.

‘Core’ terms are those setting the price or describing the main subject matter of the agreement, and in a guarantor agreement are likely to be the terms containing the rent and the extension/renewal of the tenancy.

It is now considered good practice to ensure that some form of warning notice is printed prominently on the front of the guarantor agreement, advising the guarantor of the potential liability created by signing the agreement and advising the person to take independent advice. A suggested wording for this notice is given below:

‘IMPORTANT NOTICE – This guarantor agreement creates a binding legal contract. If you do not fully understand the nature of the agreement, then it is recommended that you take independent legal advice before signing.’

The Unfair Terms in Consumer Contracts Regulations 1999 now add further safety nets to the signing of such instruments. When assessing the fairness of a contract, it is likely that the court will not only scrutinise the contract but also the circumstances in which the guarantor came to sign the rent guarantee.

Practitioners may as a result consider that it is a wise precaution to ensure that the consumer guarantor (i.e. an individual as opposed to a company who is acting as a guarantor) is provided with a copy of the guarantor agreement well in advance of the proposed date of the signature, together with the underlying tenancy agreement.

Rent Guarantee as replacement for a rental deposit: 

The recent introduction of tenancy deposit protection (TDP) legislation has added considerable commercial risks and administrative overhead to the process of accepting tenancy deposits, and many landlords are now investigating alternative methods that provide equivalent protection against tenancy default and rent arrears

It is possible that the practice of using rent guarantees will increase in the future as landlords discover the many costs and problems of working with the statutory TDP schemes and their related dispute resolution mechanisms.

Sources for Further Information: www.letlink.co.uk

• Letting Centre Guarantor Agreement Drafting and Guidance Notes.
• The Law of Guarantees, by Andrews and Millett. Published by Sweet & Maxwell.
• Letting Factsheet No. 10 - The Unfair Terms in Consumer Contracts Regulations 1999
• Letting Factsheet No. 18 - Residential Tenancy Agreements
• Letting Factsheet No. 19 - Assured Shorthold Tenancy Agreements