A rent guarantee (sometimes called a surety) is a secondary contract in which one person, X (the guarantor), promises to repay to another, Y, a debt or perform the obligations given by a third person, Z (in this case, the tenant), who is the principal debtor and the person primarily liable for the debt. In the context of residential lettings, the primary contract will, of course, be the tenancy agreement. The guarantee may work in a number of different ways; one guarantor may offer to provide a guarantee for several tenants. Equally, there may be one or more guarantors for each tenant which adds some complication in the case of joint tenancies.
A surety or rent guarantee is generally used whenever the tenant's ability to pay the rent is in question. Typical cases will be where the tenant is:
- A company. In this case, the director or, if the company is a subsidiary of a large and financially sound company, the parent company should be required to act as surety. Note that, where the tenant is a private company, a surety should always be sought.
- A student or unemployed person. Such persons have no current earnings and often little in the way of previous earnings history to rely upon. Often they have a poor financial status and this is a classic situation where a surety would be appropriate.
- A divorced or separated spouse. Where the separated person is solely dependent on maintenance payments for income, the 'paying' spouse or ex-spouse should be required as surety.
- A self-employed person. Self-employed persons can represent a higher risk for the landlord for two main reasons. Firstly, their earnings, by definition, often fluctuate from month to month and may be difficult to verify or predict accurately. Secondly, attachment of earnings orders, which can be applied by the courts, to debts owed by persons in employment, cannot be used where a person is not employed.
- A bankrupt, or other situations where financial references are unsatisfactory (e.g. County court judgements - CCJ registered against them). A guarantee will avert risk where, despite previous financial problems, the landlord or agent considers the prospective tenant to be bona fide, and good for the tenancy.
The Law of Guarantees:
As for contracts for the sale or lease of land, contracts of guarantee are required to be in writing (Statute of Frauds, 1677). Thus a verbal agreement to provide a rent guarantee will be unenforceable. The words of the guarantee should be unambiguous, and make it clear exactly what payments and obligations are being guaranteed. Another common mistake is that the guarantee simply undertakes only to meet any shortfall in the rent payments. Ideally, the guarantor agreement should also be drafted so as to cover not just the obligation to pay rent, but all the tenant’s covenants and obligations under the tenancy agreement.