New Case Highlights the Pitfall of an Unprepared Lease Guarantor
A recent case has shown that it is vital for individuals who are to give guarantees under a property lease arrangement to seek legal advice about their commitment, and that landlords should make sure that guarantors have done so, warns leading Devon law firm Stones Solicitors LLP.
In the current economic climate it is unsurprising that landlords are increasingly careful about the financial standing of prospective tenants and will often require some form of additional security.
This is particularly relevant if the tenant is a limited company and it is common practice for a landlord to require a director of the company to stand as guarantor in a lease transaction.
While it is more widely known that personal guarantees given by an individual to a bank require each party to receive independent legal advice and to confirm that they have fully understood the risks involved, from recent case law it is clear that similar considerations also apply to guarantees given under a lease.
The case in question is Trustees of Beardsley Theobalds Retirement Benefit Scheme v Yardley [2011], where a landlord of a commercial lease tried to recover unpaid rent from a guarantor when the tenant company went in to liquidation.
The guarantor was an employee of the company and argued that the guarantee could not be enforced against him as he had signed the lease under undue influence because:
• he had signed the lease simply at the instruction of one of the company directors;
• had not read what he was signing and had only been shown the signature page;
• was not aware of the legal implications; and
• had not been advised, or given the opportunity, to take independent legal advice.
The Court accepted these arguments and further held that the landlord was deemed to have knowledge of the ‘undue influence’ because despite being aware that the company was in financial difficulties, the landlord had failed to check if the employee was of sufficient financial standing and aware of the risks and implications involved.
Following this case, it is clearly important that landlords take proactive steps to protect themselves by asking the relevant questions prior to completion of a lease.
Lynn Onyett, partner at Stones, said: “It is in the best interest of all parties that, where a guarantee is to be given either within a lease or separate guarantee agreement, the proposed guarantor takes, or is at the very least strongly advised to take, independent legal advice prior to signing any documentation.”
She added: “This provides a safeguard for the landlord and allows the guarantor an opportunity to seriously consider whether they should commit to the guarantee. It has also been suggested that the tenant should pay for the provision of this advice.”
If a landlord is concerned about the financial standing of a prospective tenant then they should ensure that before they accept a nominated guarantor they obtain written confirmation that the person:
• has agreed to stand as guarantor;
• is aware of the obligations and risks associated with the guarantee; and
• has been given the opportunity to seek independent legal advice.
More information is available from Stones Solicitors LLP by calling 01392 666777 or logging on at www.stones-solicitors.co.uk.
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