Case Study: The Pitfalls of the Family Guarantee

March 31, 2022

A property developer who stood as a guarantor for a family member’s tenancy got in touch recently. They gave a written Guarantee back in 2017 on the commencement of the new Assured Shorthold Tenancy Agreement to a family member.

Unfortunately, the relationship between our client and their family member had deteriorated to such an extent that they were no longer in communication and our client did not know what the situation was until they received court papers. Our client found himself as a second defendant to a property possession and money judgment claim. The first defendant was his estranged family member.  demanding a payment of substantial rent arrears (in the thousands).

The client had attempted to liaise with the lettings agents and their solicitors, but to no avail. A substantive possession hearing had been listed and time was running out. The team at LandlordSolicitors sprang into action and had an initial meeting with the new client. He provided the claim form, statements of case, and the bundle of evidence for the hearing.

One of our solicitors reviewed the case papers and noted that there had been a new fixed term tenancy executed in 2019 on slightly different terms to the original in 2017. Our solicitor then asked the client for any further evidence he had.

Due to the client attempting to deal with the matter on his own, he had not had an opportunity to submit a formal defence to the proceedings. There was a risk that the court may decide not to entertain any further evidence advanced by him at the hearing.

The client went away and reviewed his documents. He was able to obtain an additional tenancy agreement from 2018, which had not been disclosed by the Claimant! The 2018 tenancy listed an additional tenant which substantially changed the tenancy and the interpretation of the Guarantee he provided in 2017. There was also further evidence in the form of an email from the landlord’s letting agent in 2019 discussing the need for another guarantor to release the other joint tenant for a new sole tenancy back to the family member in 2019.

This was crucial evidence for our client’s defence. We filed this additional evidence at Court on the day of the hearing and provided a copy to the Claimant’s advocate prior to the hearing.

One of our solicitors represented the client in court. The first defendant (i.e. the tenant) was not in attendance and had not dealt with the proceedings at all. This left our client in an invidious position of the Claimant (Landlord) essentially having an automatic possession and monetary judgment for the substantial rent arrears automatically, and the court finding as a consequence our client was liable for the outcome (i.e. the substantial rent arrears and the substantial claim of legal costs).

Our solicitor was able to advocate on our client’s behalf and the court agreed that the Guarantee in 2017 was not valid for the issues being advanced by the Claimant, due to the changes in the fixed term tenancies. Essentially the chain was broken between the Guarantee.

Following our intervention, the Judge instructed the Claimant’s advocate to take instructions on how they wanted to proceed, because on the evidence before him there was no case against our client.

The Law around Guarantees

Guarantees are normally required when a tenant doesn’t match the landlord and/or agents lettings criteria, such as affordability or credit worthiness.

In it’s simplest sense a guarantee is an agreement between the guarantor (the person giving the guarantee) and the landlord. The agreement normally states that the Guarantor will meet any current or future rent payments and other losses, should the tenant breach the tenancy agreement.

In order for a Guarantee to be valid, it must be in writing and signed by the Guarantor. It is always preferable for the Guarantee to be signed as a deed, rather than a simple contract. The reason for this is to prevent an argument later on that the Guarantee is invalid for lack of consideration. Without going into too much detail, a deed does not need consideration to be given, whereas a simple contract does.

Tips for Landlords and Agents

  1. The starting point is making sure that the Guarantor agreement is fit for purpose. We see a lot of landlords, and some agents, downloading stock agreements from the internet which are not fit for purpose. Because Guarantees are used in a wide variety of situations, you need to ensure the one you use is for a purpose, that is, for letting a property. Most errors we see are where a Personal Guarantee for a loan has been used.
  2. If the tenancy has started before the Guarantee is signed, then it will be crucial that it’s signed as a deed. If you are unsure about signing as a deed, then get some advice. In any event, we would always advice that the Guarantee is signed as a deed.
  3. For the sake of clarity, we would strongly advise that the terms of the Tenancy and the details of the parties i.e. Landlord and Tenant are included and/or appended to the Guarantee.
  4. Once the AST has turned into a periodic, there is normally no requirement for a Guarantee to be re-executed as the terms will normally state that any extension or renewal is covered by the Guarantee.
  5. If you intend to enter into a new fixed-term tenancy, this is when you may have issues with the current Guarantee. Any changes to the tenants, the rent, what is being let or other material terms or changes may have a negative effect on the Guarantee. If a new fixed term AST is entered into and the terms are different to what was originally agreed, then it is very likely that the former Guarantee will not apply to the new tenancy. In these circumstances a new Guarantee needs to be entered into, in the same way as the original, with update details and terms appended to it.

Unfortunately, it is very easy to assume that an original Guarantee applies to any future tenancy, particularly where the terms of the original Guarantee purports to apply to any “extension, renewal or re-grant.” However, this is not necessarily the case, and the operation of law may work against the landlord, who losses out on being able to rely on a what they thought was a valuable commodity, i.e. a Guarantee from a credit worthy individual.

 

 

 

 

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We know that legal issues with your property can be an extremely stressful experience. At LandlordSolicitors.com our experienced landlord solicitors and advisors are ready to help and find a way to resolve your issue. Call us on 0330 043 6162 or contact us online to schedule a free consultation today. LandlordSolicitors.com, 4 Clive House, Prospect Hill, Redditch, B97 4BS.

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