A guarantor must be identified on the tenant’s lease, it could be the tenant or a friend/relative. A guarantor should be a person that has suitable assets to provide security over future rental payments. The subject of a guarantor is not only an important consideration at the time of purchasing a property, it is also important when a tenant has decided to sell their business or assign the lease to another party.
On many occasions I have come across leases that have Proprietary Listed Companies as the guarantor. The problem with a guarantee from a company is that the company may be drained of its assets leaving you with nothing to make a claim on to recoup rent arrears. I once had a tenant tell me the company he had been running was bankrupt and would close immediately. He was able to walk away from the lease leaving me out of pocket with no recourse.
The other common problem I come across with guarantors listed on leases are individuals that have no financial assets. It is all very well to take comfort in the fact that Jack is a personal guarantor on your lease but if Jack is unemployed with no fiduciary assets then that guarantee is worthless. I once had a tenant about 25 years old sign a 5 year lease with me to run a video gaming business. After 6 months he told me he was running at a loss and will be closing the business. I told him he should keeping running the store until I find a new tenant as he would still be responsible for the rent until the new tenant is installed. I vividly remember his sobering reply, “I’m a month in debt now, I don’t own a house, I’m behind in my rent, my car is worth $500 and mum isn’t bailing me out anymore. I need to get a job, good luck suing me if you want”. Faced with this situation there are no avenues that do not cost the landlord time and money, given “you can’t get blood out of a stone”, you need to absorb the rent shortfall and find a replacement tenant quickly.
The most critical aspect of the guarantor to research is the quality of their assets. What I like to see is that the guarantor is an individual and actually owns real property, like a house they live in. My alarm bells ring when upon a title search the owner of the stated property is not the tenant and you discover the tenant is renting the property. A tenant owning property gives the security of getting money in arrears if legal action was to be pursued. Your lawyer can place a caveat over the property preventing its sale until your interests or arrears have been remedied. Houses in general are less fluid and can’t be quickly sold with the funds hidden from a creditor.
I have come across wealthy guarantors that have significant share portfolios, cars, boats and the presence of cash, but all these assets are fluid and can be quickly converted to cash and disposed of in the event the business takes a downturn. I discount these types of securities as they offer the landlord very little security. Note, when buying a property with an existing tenant you inherit whatever guarantee is in place and have little leverage to improve the quality of the guarantee until the next lease renewal. Where the quality of the guarantee or strength of business is in question, I have at times asked the seller to provide a 12 month rental guarantee. Sellers will also offer this in situations were the shop is being sold vacant.
Quite a common occurrence is when a tenant decides to sell their business mid lease, due to retirement or other personal reasons. In these situations the lease allows the tenant to sell their business and assign the lease to the incoming business owner. The landlord must approve the new tenant and lease assignment, if you are not satisfied with the buyer you can block the assignment as long as you are being perceived as ‘fair and reasonable’. What you can’t do however is unreasonably with hold your approval. One example I had was a Chinese Restaurant, the tenant decided to move interstate for love and wanted to sell the business to his head chef. The problem was the chef had no assets other than his car. After initially refusing to allow the assignment I eventually agreed to approve it based on the incoming tenant providing me an upfront 6 month rental bond. Later I found out that the seller funded this bond for the buyer.
In summary, when reviewing the lease guarantees be diligent on who is listed as guarantor, use your lawyer to run a search detailing exactly what assets are owned by the individual, trust or company. By getting this search done you ensure you go in “eyes wide open”.