When a newly incorporated company takes on a new working space, an entire building or even part of a building, the landlord will usually ask for various forms of security. Most commonly this is a rent deposit and a personal guarantee.
A personal guarantee is a very onerous obligation and should not be entered into lightly or without first taking independent legal advice. By signing a personal guarantee, the director of a limited company agrees that where the company defaults – for example on payment of rent – the landlord can recover those monies from the director(s) personally.
The recovery is not limited to cash sums but includes all personal assets owned by that director including but not limited to home, vehicle(s) and jewellery. In essence anything of value becomes collateral. If the debt of the company exceeds any assets held by the director then there is a risk to the director of being forced into personal bankruptcy. This landlord security method actually defeats the whole concept of limited liability status which a company would ordinarily enjoy.
Moreover, a guarantor and director may not always be the same person. If a guarantor is not involved in the day-to-day running of the company and the lease is altered (where lease does not require guarantor consent to changes) they may without knowing become personally liable for new terms. There is no requirement for the guarantor to be informed of any changes by the landlord.
Where there is more than one guarantor to a lease, it should be noted that there will often be a joint and several liability clause; this means in the event of a default the landlord can call on all or one of the guarantors to satisfy any debt that becomes owing. This would mean the guarantors would have to take proceedings against each other where one of them suffers a loss. This is preferred by landlords as it is more cost effective and expedient to pursue one individual rather than several simultaneously.
It may be worth proposing a more substantial rent deposit to avoid the need for a guarantee although this is not always possible for cash flow reasons. If you have no alternative but to provide a personal guarantee, make sure you (1) negotiate the guarantee to exclude certain assets like a family home; (2) request that the guarantee be limited (cap on amount you would become liable for); and (3) request that the guarantee be time limited (first three years of the lease).
Personal guarantees will only come to an end upon a surrender or expiry of the lease, where the lease has been assigned more than once, or where the landlord expressly releases the guarantor from their obligations pursuant to a deed of release.
