With the downturn in the economy over the last few years it has now become common practice for lease guarantees to be called in by Landlords. While commercially aware companies and business people will be well aware of their obligations under a lease guarantee there are many small to medium sized business owners who don’t fully understand the importance of the obligations they are signing up to. In fact, often the reason that one agrees to become a guarantor in the first place is that they never actually believe the guarantee will be called in.
The purpose of a lease guarantee to offset any risk attaching to the non-performance of a tenant i.e. they are a safety net for the Landlord. They are often used where the tenant is a newly trading company and cannot provide any trading history, where audited accounts highlight concerns or the tenant is a member of a volatile industry.
If you have been asked to guarantee a tenant’s obligations under a lease you should consider negotiating the below conditions into the guarantee:
- Limit the guarantee to the payment of rent and other payments under the lease only – this means you are not committing to open-ended and potentially limitless liability.
- Cap the period of the guarantee to a number of years or until a certain milestone has been reached by the tenant (usually a profits test) – this means you are not “tied in” for the entire duration of the lease.
- Insert an a maximum “overall” cap on liability – this means there are no nasty surprises if the guarantee is call in.
- If you are a personal guarantor ensure your family home is protected – this speaks for itself.
- Ensure any release of guarantee is properly documented – this means there will be discrepancy regarding the guarantee if the tenant subsequently defaults.
Morrisons is facing a potential liability of up to £20m as My Local, the group that bought the Bradford-based group’s convenience store chain, looks at options for the business, including administration. More than 2,000 jobs are at risk as My Local, which operates 120 stores, has brought in accountancy firm KPMG. My Local, led by retail veteran and The Secret Millionaire star Mike Green, bought 140 Morrisons M Local convenience stores for £25m in September last year. The deal was backed by Greybull Capital, which along with OpCapita, was one of the co-investors in the electrical retailer Comet, which collapsed in 2012. As part of the deal, Morrisons retained a guarantee on a number of lease obligations, meaning that they will revert to Morrisons if My Local collapses.