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A Quick Guide to Guarantees
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1.What is a Guarantee?
A guarantee is an agreement by someone to pay money owed by the renter if the renter fails to pay.
Normally this will be unpaid rent. However, most guarantees provide for all money owed to the landlord under the tenancy or rental agreement to be paid by the guarantor if the renter fails to pay it. This can include compensation for damage to the property and any other sums related to the tenant/renters breach of contract.
2.The legal basis of guarantees
For the agreement by the guarantor to be binding it must either comply with the rules under contract law, or be signed as a deed.
Contract law
Under contract law, for a contract to be binding, there needs to be something of value provided to the other by both parties.
So if someone buys a bar of chocolate, the customer pays the price and the shopkeeper in exchange gives the customer the chocolate. That is a legally binding contract for the sale of goods.
The ‘thing of value’ (money, a product, a service or whatever) is called ‘consideration’ by lawyers. In that context, it is nothing to do with being considerate! It is just an example of the confusing way lawyers have of giving specialised legal meanings to what are otherwise ordinary words.
If a contract has been agreed, say for someone to buy building materials worth £100,000 but the building merchant fails to deliver, the customer can go to Court and get a Court order that the merchant either complies with the contact or pays compensation. So the contact is ‘enforceable’.
However, say a merchant agrees to donate building materials for free – that is not an enforceable contract. If it just an offer to gift something.
There is also a rule in contract law which says that ‘past consideration is no consideration’. So if someone gifts some money to a business, they can’t turn around later and say ‘Hey, that money we paid you last year, we now want you to provide products to the value of that money’. Because it will be past. It was not part of an agreement to provide products. It was a gift.
Contract law and guarantees
Turning to guarantees – the ‘consideration’ is
- The guarantor agrees to guarantee money owed to the landlord by Mr A, in exchange for
- The landlord renting the property to Mr A.
That is a legally binding agreement. However if at the time the guarantor signs the guarantee, Mr A has already signed the tenancy agreement, that cannot be ‘consideration’. As it has already happened. Mr A has got the tenancy. It is not conditional upon the guarantor signing his guarantee.
This is why landlords will often require guarantors to sign their guarantees ‘as a deed’.
Signing as a deed
Signing as a deed is a way to make an agreement enforceable if there is no ‘consideration’. In the past a deed had to be ‘signed, sealed, delivered’ (as in the Stevie Wonder song) but now deeds signed by individuals no longer need to be ‘sealed’.
The document needs to say that it is intended to be a deed (for example having the words ‘signed as a deed’ above the signature) and the signature must be witnessed and the witness must then sign to confirm that they have witnessed the signature.
Normally the witnesses will need to also give their full name and address so if there is any challenge to the validity of the deed they can be called to give evidence (although in most cases this is most unlikely to happen).
3. Guarnatees and joint tenants
Something that is often not realised by guarantors is that, under most standard guarantee documents, they are guaranteeing all the tenants.
For example in a student let with several students, normally each student tenant will be required to provide a guarantor.
If all the students have signed the same tenancy agreement – they will all have ‘joint and several liability’. This means that they will each be liable for ALL money due to the landlord, whether it is down to them or one of the other tenants.
So if there is a joint tenancy where Ms A is very wealthy, and Ms B is not. If Ms B fails to pay her share or the rent or damages the property in some way, the landlord can sue Ms A for the money due as well as (or even instead of) Ms B.
It follows then that if there is a guarantee in place, if Ms A and Ms B both fail to pay the money owed to the landlord, Ms A’s guarantor is liable for the money as well as the guarantor for Ms B. As they are liable for what Ms A and Ms B are liable for, and Ms A and Ms B are both liable for the money, under the ‘joint and several tenancy’ agreement they have signed.
This means that if you are asked to provide a guarantee for someone, you need to check very carefully who the other tenants are. As under most guarantee deeds, you will be guaranteeing them too.
Note that this will not be the case if Ms A and Ms B have both signed separate tenancy agreements for their own room and shared use of the common parts of the property.
In that case they, and their guarantors, are only liable for their rent. Any for any other claims that the landlord may have under the contract (for example for damage done).
4. When does a guarantee end?
If the guarantee deed does not say anything, it will probably end at the end of the tenancy. This will either be
- when the tenants move out and give the property back to the landlord or
- if they sign a new tenancy agreement – perhaps with some different tenants.
There is also a longstanding rule (based on a case called Holme v Brunskill from 1878) that a guarantor may be discharged from liability if the underlying contract is materially varied without the guarantor’s consent.
So this would be the case if the rent was increased or the identity of the joint tenants changed, and this was not covered by the terms of the guarantee.
Most landlords will want the guarantee to continue to apply so long as the tenant remains in the property. So many guarantees will specify this. But will this be enforceable?
Changes to the tenancy
In the past, it was normal for landlords or agents to require tenants to obtain a new guarantee at ‘renewal’ ie after the fixed term had ended. At that time, tenants would be required to sign a new tenancy at a new rent supported by new guarantees.
Most tenants would do this as they were aware that landlords could evict them using Section 21 if they did not.
However, section 21 has now been abolished under the Renters Rights Act, and can no longer act as a threat to tenants. Rent can now only be increased by the statutory notice procedure discussed here.
It will therefore generally be safe for tenants to refuse to sign new tenancy agreements and/or refuse to obtain new guarantees after rent increases.
Because of this, many guarantee forms used by landlords will specifically state that the guarantee will continue notwithstanding an increase in rent or a change in the identity of the occupiers of the property.
It is believed that if the guarantor signs a guarantee where this is made very clear, this will override the rule in the Holme v Brunskill case allowing the landlord to rely on the guarantee while the tenant is in occupation.
The never-ending guarantee
The changes made by the Renters Rights Act give tenants far more security of tenure, meaning that tenants may remain in properties for many years.
So a guarantor who signs a guarantee form guaranteeing the liability of (say) their son or daughter, could arguably be held liable for arrears occurring ten years later.
I am not aware of any case law relating to the enforceability of a guarantee in these circumstances. However, I suspect it would depend on the wording of the guarantee.
In view of the Unfair Terms rules, it could also depend on the fairness of the guarantee as a whole. So a guarantee which included limits on the guarantor’s liability could be more likely to be enforceable.
See section 5 below on guarantor-friendly guarantees for more on this.
It is important, therefore, that if you are asked to guarantee someone’s tenancy, you read the guarantee document you are being asked to sign carefully. It is also a very good idea to obtain legal advice before you sign.
Mrs Jones agreed to guarantee her niece, Susan, when she signed a tenancy agreement for a flat in Manchester. Susan had an assured periodic tenancy. The rent was increased under the section 13 notice procedure from £1,000 per month to £1,200 per month a year later, but there were no further rent increases.
Six years later, she fell into arrears, and the landlord claimed against Mrs Jones under her guarantee. Mrs Jones denied liability saying that she had only agreed to guarantee Susan while the rent was £1,000 and had not agreed to guarantee her new rent. She informed the landlord that she would defend any proceedings brought for the money on that basis.
We don’t have any case law to hand which would cover this situation, but if the landlord sued and Mrs Jones defended, the Court’s decision would depend to a large extent on the precise wording of the guarantee.
Which is why you should always read the terms of any guarantee deed carefully before signing it.
5. Guarantor friendly guarantees
It is possible to draft a guarantee so that the liability of the guarantor is limited. This can be
- Just guaranteeing rent arrears due from an individual named tenant, where the property is let to joint tenants
- Capped at a specific sum (say £5,000) or
- Limited to a proportionate part of any debt due (eg 25% if there are four tenants), or
- Limited in time – e.g., up to a specific date after which it will lapse, or
- Providing for any claim for damages to be apportioned among the tenants, or
- Including all or just some of the above
Landlords don’t like these, however, as they can result in them being out of pocket.
So say, in our example, an individual guarantor’s liability is limited to £5,000 and limited to money owed by a specific tenant. If Ms B trashes the property and does £7,000 worth of damage, the landlord will not be able to recover the full amount due. He can’t claim anything from Ms A’s guarantor, and the money due from Ms B’s guarantor will be limited to £5,000.
However, if guarantors are firm and the tenant’s responsible people, landlords may be persuaded to agree to a ‘guarantor-friendly’ guarantee.
6. If you don't have a guarantor
Landlords are usually pretty fussy who they will accept as a guarantor. They will normally require a property-owning person resident in the UK.
The reason for this is that there is no point in taking a guarantee from someone who is unable to pay (such as someone who has no money). Or someone who lives abroad – as it will be difficult, if not impossible, to sue them through the courts.
In that case, you may be able to use a professional guarantee company. These will agree to guarantee a tenant upon payment of a fee.
They won’t accept everyone but it is worth checking out. You can normally find companies by a search on the internet.
This is the end of this article.
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