Jul 21, 2015

Guarantee of Business Leases

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Have you guaranteed a tenant in a business lease?

In many business lease transactions especially where there is a limited company being the tenant, it is usual that a guarantor is found to give guarantee when the tenant may not be able to meet its obligations under the business lease. This is because a limited company is a separate legal person if it cannot meet its obligation, it is not possible to seek redress from its directors without a guarantee being given by them. This is common for new companies or companies without sufficient standing to be trusted by the landlord.

Unfortunately some guarantee(s) would never be given in business leases because of the risk to the prospective guarantors. If they had been armed with the information, and advice they ought to have received at the time.

It is quite common for family members, friends and sometimes even employees to be persuaded to give guarantees in business leases without fairly appreciating what the effect of the guarantee will be when that guarantee is called in.

In the case of Trustees of Beardsley Theobalds Retirement Benefit Scheme v Yardley [2011] EWHC 1380 (QB) this was one such case where guarantee was called in after the tenant was liquidated.  However it was found in the High Court at first instance that the following had taken place being relevant here to Mr Yardley the defendant;

1.The director of the tenant did not provide ample opportunity for the defendant to have proper independent legal advice in respect of the guarantee.
2.The defendant was effectively misled about the need for the guarantee;
3.The defendant was never in a position to appreciate the financial risk and was not aware of the financial weakness of the tenant.

A guarantee can be affected by the doctrine of undue influence especially as in the above that the guarantor had no financial interest or gain in being the guarantor.

Those that are seeking guarantors (where they cannot give themselves such as a director in small companies and other similar situations), must allow any proposed guarantor to take full independent advice with full accurate financial information before accepting the guarantee. Commercial landlords should also ensure that the guarantor advisor is preferably different to the advisor of the proposed tenant. There should be a certificate of independent advice signed by the solicitor confirming the advice or lack of where it is plainly declined. Although this may increase the initial costs however it will still represent a good economy in the long run in case there is some dispute during the course of the lease.

We are business lawyers in London who can assist you to get advice whether any guarantee could be unenforceable, please contact 020 3026 6321.