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Landlord Security: Rent Deposit or Guarantors

Posted: 10th October 2013   In: Commercial Property

As the economy appears to be taking a turn for the better and vacant units in town centres falling from 1 in 7 to 1 in 5 (Local Data Company Limited), landlords and tenants are still precarious about entering into leases of premises. There is a fine balance seeking to protect an interest and ensuring that vacant units are occupied against the backdrop of rental income to ensure at least some return on investment, albeit for the landlord to comply with loan covenants to the bank, is achieved.

It is not unusual during both boom periods and lean times for a landlord to seek some form of security from the tenant. In part the landlord will be keen not to impose overly onerous conditions in seeking to let premises. The landlord will need to consider the strength of the tenant to perform the obligations of the lease and whether or not any additional security is needed and whether such conditions will deter potential tenants.

One form of security that a landlord may seek from a tenant is a rent deposit and if such is agreed then the level of such deposit can typically be the equivalent of 3 or 6 months rent. The rent deposit would need to be held by the landlord in a separate designated account and the interest earned must accrue to such deposit account and be credited to the tenant. The landlord would be entitled to withdraw from such deposit account, monies that are properly due to the landlord and particularly where the tenant has defaulted. The rent deposit by its nature results in the landlord having ‘money in hand’ and accessible immediately should the landlord need to recover any monies properly due to them. Although by having a rent deposit, this may cause at least short-term cashflow issues for a potential tenant who may require those additional funds to make good the premises.

In addition to or as an alternative to having a rent deposit, the landlord may require the tenant to provide a guarantor and quite possibly two or more persons to stand as guarantors. The guarantor would guarantee to the landlord that the tenant will perform the obligations under the lease and where the tenant fails to do so, then the landlord may require the guarantor to perform such obligations and make good the default of the tenant. It is not necessary for the landlord to have first pursued matters of the default with the tenant and only having exhausted such then to turn to the guarantor – i.e. the landlord can, if it chooses to do so, pursue the guarantor even where the landlord has not first pursued the defaulting tenant. In the event of the lease to the tenant being disclaimed as a result of the insolvency of the tenant, the landlord may require the guarantor to take a lease of the premises on the same terms as the disclaimed lease to tenant, such lease to the guarantor only being for the unexpired term of the as at the date of the disclaimer. It is particularly usual to have a guarantor in place where the lease is being granted to a tenant company. By having a guarantor in such circumstances will result in there being some personal liability against such individual rather than in the absence of guarantors the landlord only being able to pursue a limited company which could be dissolved in an attempt to avoid any liability to the landlord pursuant to the lease.

The landlord may have to finely balance its options regarding letting of premises and such may primarily be dictated by demand as to which conditions can be imposed. In relation to a rent deposit and guarantor, the landlord may consider a rent deposit worthwhile on the basis that a ‘bird in hand is worth two in the bush’. It is important for the position regarding the landlord’s security to be formalised by way of deed and appropriate legal advice being obtained.

Santokh Singh specialises in commercial property matters.  If you have any questions about the content of this article you can contact him on 01582 514393

 

Posted by: Santokh Singh
Commercial Property
Luton Office