The personal guarantee you signed for the lease

It is two pages at the back of the lease and the only document in the file that reaches past the company. What it covers, when it ends, and the three things a landlord will normally agree to before completion.

Problems, in order · Part of Outsourced General Counsel

The guarantee is usually two pages at the back of the lease, signed on the same afternoon as everything else, and it is the only document in the file that reaches past the company and into your own house. Founders sign it because the deal will not complete without it. That is a reasonable decision. What is not reasonable is signing it without knowing which of the three things it might be, because they have very different consequences, and because two of the three can normally be negotiated down before completion.

A landlord asking for a guarantee is not being unusual. A new company with no trading history is asking somebody to hand over a building for ten years on the strength of a balance sheet that does not exist yet, and the guarantee is how that gap gets closed. The question is never whether to give one. It is what it covers, how long it lasts, and what ends it.

Am I personally liable for my company's lease?

That distinction sounds like a technicality and it is the whole thing. Nothing about being a director makes you liable for your company's lease. Liability comes from the guarantee, the rent deposit deed, or an indemnity buried in the agreement for lease, and each of those is a document somebody put in front of you and you signed. If you cannot find one, it is worth establishing that properly before assuming the worst, because the answer is sometimes that there is nothing there.

Where there is something there, the next question is what it actually says, and this is where most files disappoint. A guarantee drafted by a landlord's solicitor is normally unlimited in amount, unlimited in time, and drafted as a primary obligation rather than a secondary one. It covers the rent, and it also covers the service charge, the insurance rent, the interest, the dilapidations at the end of the term, and the landlord's costs of enforcing against you. On a ten-year lease of a modest unit, the number a founder has in mind when signing is the annual rent. The number the document supports is considerably larger.

Does the guarantee end when the lease is assigned?

This is the most useful thing in the law of guarantees and the least well known. It comes from the Landlord and Tenant (Covenants) Act 1995, which abolished the old rule that an original tenant stayed on the hook for the whole term no matter who took over. Section 5 releases the assigning tenant. Section 24 then carries the release through to anyone standing behind that tenant:

Three qualifications matter, and they are the reason this is not the end of the conversation.

The first is the date. Sections 3 to 16 and 21 of the Act apply only to new tenancies, and a tenancy is new if it was granted on or after the Act came into force on 1 January 1996, other than under an earlier agreement or court order. An older lease, or a lease granted last year under an agreement for lease signed in 1995, sits under the old regime.

The second is that the assignment has to be lawful. An assignment made in breach of the alienation covenant, without the landlord's consent where consent was required, is an excluded assignment and does not release anybody. Founders occasionally assign a lease to a group company informally, to tidy up a structure, and discover later that they have kept every obligation and given up the premises.

The third is the authorised guarantee agreement. Section 16 permits a landlord to require the outgoing tenant to guarantee the incoming one, so the release the Act gives with one hand can be taken back at the point of assignment. An authorised guarantee agreement cannot extend past the assignee's own release and cannot be more onerous than the original liability, but within those limits it is enforceable. Whether a landlord can demand one at all depends on what the lease's alienation clause says, which is a clause worth reading years before you need it.

What is the difference between a guarantee and an indemnity?

Landlords' documents frequently do both, and the drafting that achieves it is easy to miss. A clause saying the guarantor is liable "as primary obligor and not merely as surety" is converting the guarantee into something closer to an indemnity, and it is doing so to defeat the ordinary rules that release a guarantor when the landlord and the tenant vary the lease behind their back. A clause saying the guarantor's liability is unaffected by any variation, concession, or forbearance is doing the same job from a different direction.

This is not a reason to refuse to sign. It is a reason to know which document you signed, because the two are argued very differently when the landlord comes calling, and the answer changes what a sensible response looks like.

How long does it run after the company stops trading?

Insolvency is the moment the guarantee was written for, so it is the moment it works hardest. Liquidation does not extinguish the guarantor's obligation; it usually triggers it. And the disclaimer provision is the one that surprises people, because it converts a promise to pay money into an obligation to become the tenant of a building you no longer want, at the rent agreed in a different market.

Six months of arrears, dilapidations, and the landlord's enforcement costs on a unit you have already walked away from is the shape most of these disputes take. It is not the catastrophic version. It is the ordinary version, and it is worth understanding before the company is in difficulty rather than after, which is the point at which directors' personal guarantee disputes become considerably harder to improve.

The three positions usually available before completion

Landlords expect to negotiate the guarantee and founders routinely do not ask. Three asks are ordinary, and a landlord's agent will not be surprised by any of them.

A cap. A guarantee limited to a fixed sum, commonly expressed as a number of months' rent, or to a defined figure that covers rent and service charge and nothing else. This is the single most valuable amendment available, because it converts an unknown exposure into a number you can put in a plan.

A time limit. A guarantee that falls away after a defined period of compliant trading, or on the company reaching a stated profitability or net asset test. The landlord's real concern is the early years, and a guarantee that expires once the risk it was written for has passed is a fair reflection of that.

A release on assignment, and on surrender. Confirmation in the guarantee itself that it ends on a lawful assignment, and that the landlord will not require an authorised guarantee agreement where the incoming tenant meets stated covenant strength. The Act gives you the first part in the ordinary case; the document can take it away, and saying so expressly is cheap at the negotiation stage.

Where the landlord will not move on any of the three, a rent deposit is often the alternative worth proposing. It ties up cash, which founders dislike, but it caps the exposure at the deposit and it is returned.

What to do if you have already signed

Find the document. Not the lease, the guarantee, and the agreement for lease as well, because an indemnity in the agreement can outlive the guarantee in the lease. Establish the date the lease was granted, whether it was granted under an earlier agreement, and what the alienation clause permits. Then work out what the exposure actually is on the current numbers, which is usually a smaller and more manageable figure than the one in your head, and occasionally a larger one.

Dinmore Bell acts as an outsourced General Counsel for founder-led businesses, which in practice means holding this kind of document in a register with the dates that matter against it rather than in a drawer. The lease guarantee sits in the same category as the rent review you did not diary: a provision agreed years ago that decides an outcome years later, and whose cost is set by whether anybody read it in between. The same applies across a portfolio, which is why tenants and occupiers are usually the businesses that benefit most from having the whole estate written down in one place.

Where a specialist is needed

Enforcement proceedings on a guarantee, a claim in the company's insolvency, or an application for relief from forfeiture are conducted by solicitors and counsel, and Dinmore Bell instructs and coordinates them. The tax treatment of a payment made under a guarantee, and whether any relief is available for it, is confirmed by regulated tax advisers. The reading of the documents, the negotiation with the landlord's agent, and the decision about what to offer and when are the parts Dinmore Bell owns.