Guarantor agreements – safety in numbers

A guarantor agreement and a deposit are often considered an important safety-net for landlords to recover costs owed under the tenancy agreement. However, unlike a deposit, a guarantor agreement enables the landlords and/or their agents to pursue outstanding costs from a third party (the guarantor) and this can be crucial where the tenant would unlikely be able to pay the full costs outstanding at the end of the tenancy.

Sadly, it is not uncommon for tenants to leave the property in severe disrepair and/or owing significant rent arrears at the end of the tenancy. Although a deposit may help to reduce the costs outstanding (if a deposit was taken), the landlord may struggle to pursue the remaining costs outstanding under a separate debt claim against the tenant at the end of the tenancy. If a guarantor is linked to the tenancy, the landlord may wish to pursue the tenant and guarantor or only the guarantor for the outstanding costs and this could potentially reduce delays and loss.

As such, it is advisable to enter into a guarantor agreement as part of the tenancy where there is a real possibility the tenant may not be able to meet their financial obligation in relation to the tenancy and a guarantor is available. However, where a guarantor agreement is entered into, it is important to consider where the guarantor’s liability falls and possibly ends in relation to the tenancy agreement. Before we consider the guarantor’s liability in further detail, we will first consider the basics.

What is and who can be a guarantor?

A guarantor is a third party that can be pursued for payment if the tenant fails to comply with their obligations under the tenancy agreement. The guarantor can be a family member and/or friend of the tenant (or even local authority in certain cases), but it is someone likely to have a good income and credit score, lives in the UK and is a homeowner.

Guarantor’s liability

If a third party agrees to become the guarantor and to be held liable for any costs arising from breach of tenancy agreement, he/she will provide legal assurance to pay the costs owed and this is known as a ‘guarantee’. The terms of the guarantee will be held within either the tenancy agreement that both the potential tenant and guarantor signs or under a separate document to be signed by the potential guarantor only.

The terms of the guarantee (set out within the tenancy agreement or separate document) will discuss the extent of the guarantor’s liability including whether it will cover other tenants (if any), damage to the property, variations to the tenancy and tenancies beyond the fixed term.

It is important that the potential guarantor reads the terms of the guarantee carefully before signing. Additionally, the guarantor must review and approve a copy of the tenancy agreement before he signs the guarantor agreement, as a guarantor cannot be held liable to pay costs with respect to breach of the tenancy agreement by the tenant if he/she has never seen the tenancy.

Once the tenancy has been approved and the guarantor agreement signed, the guarantor will be liable pursuant to the terms of the agreement subject to whether the agreement has been signed and executed as a deed (if necessary).

Does the guarantor agreement need to be signed and executed as a ‘deed’?

This is an important question that all landlords and/or agents must consider as it will impact whether the guarantor agreement can be relied upon to pursue any outstanding costs under the tenancy against the guarantor.

– Where the terms of the guarantee are set out within the tenancy agreement and signed by both the tenant and guarantor – the agreement does not need to be executed as a ‘deed’

– Where the terms of the guarantee are set out within a separate document – the agreement should be signed by the guarantor before the tenancy is signed by the tenant or it should be ‘signed and executed as a deed’.

In summary, if the guarantor agreement is signed after the tenancy agreement is signed, it must  meet the requirements under Law of Property (Miscellaneous Provisions) Act 1989 to be signed and executed as a deed. This includes making it clear on the guarantor agreement that it is intended to be a deed and the guarantor’s signature is witnessed. Failure to comply with the above requirements (if applicable) will mean that the landlord and/or agent will not be able to enforce the terms of the guarantee to hold the guarantor liable for costs outstanding under the tenancy.

The legal reason why the guarantor agreement must be signed and executed as a deed is because ‘consideration’ is lost when the tenancy is signed by the tenant first, which is a key requirement to create a contract containing terms setting out the guarantor’s liability. However, ‘consideration’ is not required to create a deed and the terms setting out the guarantor’s liability can be enforceable therein, provided the agreement is signed and executed as a deed in accordance to Law of Property (Miscellaneous Provisions) Act 1989.

Is the guarantor agreement still enforceable after the fixed term has expired or upon a renewal tenancy agreement?

This will depend on how the guarantor agreement is drafted. If there is nothing in the agreement that specifically states the agreement is enforceable after the fixed term has expired – it will be taken that the agreement ends following the fixed term expiry and the guarantor will be liable only for costs due up to that period.

If the guarantor agreement specifically states that it will continue throughout a periodic tenancy and/or following creation of a new fixed term – the guarantor may be liable subject to the terms of the agreement. This may include liability for costs up until the tenancy has ended and any damages caused within the property. However, the law does not want to impose an unlimited liability in time on the guarantor and there is a risk that the court may not be prepared to enforce the guarantor agreement for any costs outstanding under the tenancy after the fixed term has expired (despite a contrary term within the agreement). This may be particularly relevant where the guarantor has attempted to end his/her liability at the end of the fixed term.

Additionally, there is a risk that the guarantor’s liability will end upon any renewal tenancy agreement and no wording under the guarantor agreement would suffice in making the guarantor liable under any renewal tenancy agreement signed by the tenant. This is because the guarantor can only be liable for any terms and conditions under a tenancy agreement they have agreed to. To eliminate this issue, the landlord must get the guarantor to approve the renewal tenancy agreement and re-sign the terms of the guarantee set out within the renewal tenancy agreement or under a separate document.

Is the guarantor agreement impacted if there are any changes to the tenancy agreement?

This is a good question and would depend on the changes made to the tenancy agreement. However, there is a risk that any changes made to the tenancy agreement would invalidate the guarantor’s liability under the guarantor agreement. To eliminate this issue, the landlord must get the guarantor to approve the changes under the tenancy and re-sign the terms of the guarantee set out within the amended tenancy agreement or under a separate document.

Conclusion

Despite the many requirements to create an enforceable guarantor agreement to hold the guarantor liable for any costs outstanding under the tenancy, there are many benefits to obtaining a guarantor. In addition to pursuing the guarantor for costs outstanding, there may be further enforcement options available against the guarantor rather than the tenant. For example, a guarantor is likely to own a home which could be subject to a ‘charge’ to recover costs outstanding when their property is sold. 

If you would like assistance in creating an enforceable guarantor agreement or checking whether the agreement can be enforceable, please contact Woodstock Legal Services and we would be happy to assist.