14 December 2010 by Yezdan Izzet

Third Party Guarantees and what you need to know

It is common on the grant of a commercial lease for the tenant’s obligations to be guaranteed by a third party (known as a guarantor) especially where the tenant is a company as the landlord may require the Directors to act as guarantor of the tenants obligations or where there is a long commercial lease (usually above 5 years). In addition, on the sale or transfer of a commercial lease it is usually a requirement that the “outgoing tenant” enters into an Authorised Guarantee Agreement effectively guaranteeing the obligations of the new tenant under the lease. This is so as to ensure that if the tenant defaults on any payments due under the lease or fails to comply with its other obligations under the lease the landlord is able to pursue the “former tenant” or “guarantor” in respect of any funds due.

The problem for “former tenants” and “guarantors” was that prior to the Landlord and Tenant (Covenants) Act 1995 (“the Act”) landlords often allowed huge arrears to accrue over a period of years without informing the former tenant or guarantor and then would be able to serve a demand on them requiring that they pay up.

Luckily for “former tenants” and “guarantors” this position was remedied by Section 17 of the Act. This requires landlords to serve a notice of intention to recover the arrears upon the former tenant or guarantor. The problem for landlords is that the notice must be served within 6 months beginning on the date when the amount payable becomes due otherwise the amounts sought will not be recoverable. As such, if a landlord intends to recover outstanding charges from a “former tenant” or “guarantor” he can only allow the charges to accrue up to a period of 6 months.

This applies to rent, service charges, interest and any other liquidated sum which is payable as a result of a breach of covenant (e.g. where a landlord carried out repairs to the property as a result of the tenants breach and is entitled under the lease to recover those charges from the tenant). The amount due is known as a fixed charge.

The notice must be served before the landlord can take any action even if the charges fell due within 6 months and the notice must be in prescribed form otherwise it will not be a valid notice. This provision only applies to “former tenants” and “guarantors of former tenants”. It does not apply to the guarantor of the present tenant. However, where the lease has expired and the tenant becomes a former tenant the notice will need to be served on the tenant at that stage and any guarantor. Once the former tenant or guarantor makes payment they may be entitled to an overriding lease of the property.

Although Section 17 may appear fairly straight forward at first glance, there are a number of factors which may affect the landlords notice (not least the validity of the notice) and it is always wise to ensure that legal advice is sought as soon as the existing tenant defaults on any payments or commits any other breaches of the lease so as to ensure that any action which can be taken against a former tenant or guarantor is dealt with correctly and in time …

15 November 2010 by Sonal Ghelani

Houses of Multiple Occupation

If you are a Landlord of a house which you let out to up to six tenants, then you should be aware that the law has changed from 1 October 2010, as you no longer need to apply for planning permission for a change of use from a dwelling house to a small HMO (House of Multiple Occupation).

14 December 2010 by Vincent Billings

Liquidated damages off a ducks back

Liquidated damages clauses in commercial contracts provide for the payment of a specified amount by a party who is in breach of contract, to the other party. Such clauses are enforceable if the amount stated in the contract is a genuine pre-estimate of the loss suffered by the other party.

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