Wake-up call: Should you provide a guarantor when taking over a new restaurant lease?
Wary landlords can ask for an authorised guarantee agreement when taking on new tenants. Claire Timmings looks at who's liable for what
You are looking at buying a restaurant lease and the landlord requires both you and the outgoing tenant to give guarantees on the lease. But is this correct and should you be signing up to something like this?
The law
A landlord will often try to secure as much protection as possible on a lease to ensure that the tenant will be able to pay the rent and observe and perform all of the other obligations under the lease.
If there is any suggestion that the tenant may not have sufficient resources to do so, the landlord will often ask for additional security on the lease, for example, a guarantee or a rent deposit for a given amount of money.
A landlord can often insist upon certain preconditions in a lease being satisfied in order to allow the lease to be sold. These include that the outgoing tenant provides an authorised guarantee agreement (AGA), where it guarantees its immediate successor to the lease. Often any guarantor of that tenant can be required to guarantee them under the AGA. It can also usually require a guarantor for the buyer if reasonable.
Giving a guarantee can be problematic as, if the landlord insists that it is given by directors, they will have their personal assets exposed. Even a parent company guarantee can have its problems because, if the tenant defaults under a guarantee, the guarantor is liable:
for any non-payment of rent or other breach by the tenant of the lease; and
to pay a sum (usually at least six months' rent) or take a new lease for the remaining period if the lease is forfeited, or if the tenant goes into liquidation and the lease is disclaimed.
A parent company guarantee by a related company can also have its problems, as if there is a reorganisation within the group, the tenant will, as the law stands, be prohibited by the landlord from later transferring the lease to that guarantor and that guarantor cannot guarantee another group company to whom the lease is transferred.
Expert advice
When looking to take on an existing lease, you should find out in advance exactly what the landlord can and cannot require as a condition of giving consent to allow the lease to be transferred. Try and negotiate alternatives to providing a guarantee. A rent deposit is one option, but this can tie up cash for a period of time. However, you can negotiate suitable early release mechanisms, so if you achieve net profits of, say, three times the annual rent or if you sell on the lease, the rent deposit money will be released.
Bank guarantees are not usual and not recommended as they are very expensive to operate and difficult to negotiate.
To-do checklist
Get your lawyers to review the terms of the lease before you commit yourself to progress to the transaction.
Investigate options other than providing a guarantee, such as a rent deposit.
If the landlord insists on some sort of security, try and negotiate suitable early release mechanisms, for example, by reference to a net profits test so that the guarantee or rent deposit can be released.
Avoid agreeing to give a guarantee of any outgoing tenant's obligations if possible.
Beware
If you give a guarantee you could have your assets exposed. If the tenant company defaults and the lease ends, a landlord can require the guarantor to take on a new lease for the remainder of the term or to pay up a pre-agreed amount due under the lease. Suitable advice early on can help minimise such liability.
Contact
Claire Timmings is a retail and leisure property lawyer at Charles Russell Speechlys LLP
