Security for Landlords
When agreeing the Heads of Terms for a lease, a Landlord should consider whether they want any form of security, to provide comfort in the event their Tenant defaults under the lease.
The most common types of security are Rent Deposit Deeds, Guarantees and, if assigning a lease, an Authorised Guarantee Agreement. Each mechanism provides different levels of security for a Landlord.
Rent Deposit Deeds
A rent deposit deed involves the tenant providing an agreed sum (usually equivalent to 3-6 months’ rent plus a sum equivalent to VAT if the property is opted to tax) to be held by the landlord, subject to the terms of the rent deposit deed which typically provides:
- The deposit must be kept in a designated, interest bearing account;
- The landlord may withdraw funds on a default or breach by the tenant of the lease (and subject to any conditions of the deed, for example, the tenant may want the opportunity to make good any default or breach within ‘X’ number of days before the landlord can withdraw from the deposit);
- The tenant will be required to top up the deposit to replace any funds withdrawn due to a breach or default (or if the rent increases under the rent review provisions in the lease);
- The deposit will be held by the landlord either:
- On trust, where the landlord is the legal owner of the deposit but the tenant retains a beneficial interest; or
- By charge, where the tenant is the legal owner of the deposit and landlord holds a fixed equitable charge over the deposit.
Considerations:
- A tenant may request, particularly for a longer term lease, that the rent deposit is returned after a certain amount of time (for example halfway through the lease term) on a good behaviour basis. This means that the deposit is to be returned if it has not been required to be drawn down on, or if no breaches of the lease have occurred (or if they have occurred they have been remediated).
- A landlord should carefully check the terms of the rent deposit deed when considering making a withdrawal to ensure the terms permit them to do so and any action they take is in accordance with the agreed provisions of the deed.
- If there is a material default by the tenant (such as non-payment of rent) a landlord may want to consider alternative remedies, such as forfeiture (if permitted by the lease) as drawing on the deposit may waive the Landlord’s right to forfeit. The sums under the deposit can usually be drawn upon after forfeiture if the rent deposit deed provides for that.
Guarantor
Asking a tenant to provide a guarantor means they must nominate someone (who usually will be a party to the lease) and who will covenant that, in the event the Tenant defaults under the lease, they will step up and fulfil the tenant’s obligations.
The scope of obligations the guarantor will cover will be a point for negotiation. For example, the guarantor may have narrower obligations and simply cover rent defaults under the lease or alternatively, they may take on a wider obligation and cover all tenant obligations and may even be required to take a new lease in place of the tenant if the principal lease is disclaimed or forfeited.
Guarantors should obtain independent legal advice on the obligations and liability they will be incurring. In particular, if an individual is giving a personal guarantee they should be made aware that their personal assets will be at risk if the tenant defaults.
Considerations:
- Any variations or renewals to the lease will likely release the guarantor unless the guarantor provides consent or a variation is clearly insubstantial or incapable of adversely affecting the guarantor. Best practice is to have the guarantor be party to any variations or renewals.
- If a lease is found to be unenforceable or the tenant not liable under the lease, the guarantor will not be liable given that their obligations are linked to the tenant’s obligations under the lease.
- If the tenant assigns the lease and an authorised guarantee agreement (AGA) is required a Landlord should consider whether, for additional security, they require the guarantor to the lease to be party to the AGA. This would mean if the outgoing tenant providing the AGA defaults, the guarantor acts as a backup for the outgoing tenants liability under the AGA.
Authorised Guarantee Agreement (AGA)
This form of security is on only applicable to the assignment of a lease, where a new tenant will essentially be taking on the remainder of the lease term, and the ongoing obligations under it, from a current/outgoing tenant.
Contact Us
If you would like further legal advice on any of the issues raised in this article, please contact Jemima Lister at jlister@prettys.co.uk
You can also view our other commercial property services here.
