COVID-19: Pursuing a guarantor of a commercial lease

The government’s moratorium preventing commercial landlords from forfeiting commercial leases and evicting tenants for non-payment of rent has been extended until 31 December 2020.

Code of Practice

Where a tenant is unable to pay their rent, either in full or at all, the government is encouraging the parties, particularly the landlord, to follow its “Code of Practice for commercial property relationships during the COVID-19 pandemic”. But, as the Code of Practice makes clear, “This is a voluntary code and does not change the underlying legal relationship or lease contracts between landlord and tenant and any guarantor” (our emphasis).

Key issues

With that in mind, as a landlord, you may be considering a claim against a guarantor. Before doing so, however, there are some key issues to consider. These include, but are not limited to:

• Is the guarantor in a position to clear any arrears? If, like your tenant, they are also in financial difficulty, are they worth pursuing? Could doing so end up costing you more money?
• Have any notice provisions contained in the guarantee been complied with? For example, there is often a requirement that the guarantor be notified of the breach within a certain period of time. Failure to comply with notice provisions may prevent a claim against the guarantor.
• If relying upon an authorised guarantee agreement (AGA), notice must be given to the guarantor within six months of the sum falling due, failing which you will be prevented from claiming from the guarantor.
• If you are currently considering varying a lease, do not forget to obtain the guarantor’s consent to the variation. Failure to do so may render the guarantee unenforceable against the guarantor.
• Upon exercise of the guarantee or payment of the debt, the guarantor may be entitled to exercise step-in or other rights. Are you prepared for this?

What should you do immediately?

As the timescales involved in pursuing a guarantor are inevitably tight, it is advisable to check the terms of any guarantee as soon as possible and ensure that any notices are served in plenty of time. Even if you are hoping to avoid relying on a guarantee, or the situation has yet to deteriorate to that extent, it is still crucial to know and understand the position in order that you are ready to proceed immediately should the situation change.

With the implications of getting this wrong potentially so serious, you should also consider taking expert legal advice at an early opportunity.