Deeds of Guarantee
So. You have found the ideal tenant. He has a nice personality, no unpleasant personal habits, and you feel sure that he would look after the property. The only problem? He is in a low paid job and you are worried about his ability to pay the rent. What can you do?
The answer is to take a guarantee. This is done as a matter of course for student lets, and increasingly is being asked for other tenants, who landlords feel may have problems paying their rent.
There are two ways this can be done.
1 Including it in the tenancy agreement
Probably the simplest is use a tenancy agreement which includes a guarantee section and which the guarantor signs as well as the tenants. The problem is that where you have a lot of tenants (as in many student lets) the document becomes unwieldy if they all have their own guarantor.
Often also the guarantors cannot come to your office to sign, so the paperwork needs to be sent out to them for signature. It is not a good idea to send out the original tenancy on a ‘round robin’ basis, as if it gets lost everyone will have to sign again.
The answer is the next option:
2 Getting the guarantor to sign a separate deed of guarantee
If a separate document is used however, it should either be signed before the tenancy is signed, or should be ‘signed as a deed’ (which means getting the signature witnessed).
There is a legal reason for this – the ‘consideration’ or benefit that the guarantor will get, is the tenancy being granted to the tenant. If the tenancy has already been signed and agreed, then there is no ‘consideration’ and the guarantee could, therefore be unenforceable. Unless it is signed as a deed (I look in more detail at signing documents later in the series).
Note that the guarantor must always see and approve the tenancy agreement before he signs – this is not a problem if the guarantee is part of the tenancy agreement. If it is a separate document, though, you should attach a copy, and ideally get the guarantor to sign and date it at the same time as he signs the guarantee. A guarantor cannot be forced to pay up in respect of a tenancy agreement he has never seen.
Guarantees where there are joint tenants
Where you have guarantees for tenancy agreements with joint tenants, it is not often realised that the guarantor is guaranteeing all losses. So in the case of a student let, a parent may end up paying the landlord in respect of damage done, not just by his son, but by his son’s reckless friend.
It is difficult to prevent this sort of injustice, due to the fact that joint tenants are all collectively ‘the tenant’ so legally it is hard to find a way to make guarantor Jones senior only liable for damage caused by tenant Jones junior. Making the guarantor only liable for a percentage of loss can also be unfair. For example, Jones junior could be responsible for all of the damage, or none of it.
In practice, most tenancies seem to work fairly well, mainly due to the parties being reasonable about it and sorting things out among themselves.
Guarantor friendly guarantees
There are some ‘guarantor friendly’ guarantee deeds available, where there is an attempt to limit guarantor’s liability if the person they are guaranteeing is not responsible for the loss. In fact, I drafted one up myself a while ago which members of my Landlord Law service can use.
The feedback I got from landlords though was that they did not want a guarantee where there was a likelihood that they might not be able to recover all their losses. So my form is available as a draft only.
However, some landlords have used it, mainly where they are very keen for a let to go ahead but the guarantors refuse to sign a traditional guarantee.
Duration of guarantees
The guarantor will generally sign up for the fixed term of the tenancy. Landlords though will want him to be liable for the whole time the tenant is living at the property.
You can provide for the liability of the guarantor to extend beyond the end of the fixed term, but if so the guarantor should have the right to cancel this on notice (he cannot normally cancel during the fixed term).
My guarantee deeds deal with this by giving a notice period to be two months. The landlord can then serve a section 21 notice on the tenant if notice of termination is received from the guarantor, and tell him he will need to find another guarantor as a condition of being allowed to stay in the property.
When guarantees are automatically cancelled
Note that any guarantee will be automatically cancelled if
- You sign a new tenancy agreement with the tenant, or
- If the terms of the existing tenancy agreement are changed – for example, if the rent is increased.
In both of these circumstances, you will need the guarantor to sign a new guarantee deed.
The reason for this is that the guarantors can only be held responsible for something he has already seen and agreed to. If the terms of the tenancy are changed, then guarantors have to approve the change in a new guarantee deed if they are to be bound by them.
Optimistic clauses in guarantee deeds providing for the guarantee to continue so long as the tenant is in occupation and notwithstanding any changes to the tenancy will almost certainly be unenforceable. If any of these changes occur with your tenancy, the only safe option is to get the guarantor to sign a new deed of guarantee.
Two final points
- Make sure you reference the guarantor as well as the tenant. There is not a lot of point in taking a guarantee from someone who is as impecunious as the tenant!
- Be careful also about allowing the tenant to take the guarantee deed away to get it signed. It is not unknown for the tenant to forge the signature himself. I have known at least one case where this happened.
Tomorrow I will be looking at agents.
NB Find out more about my Tenancy Agreement Service on Landlord Law