Partnership
NOVEMBER 2011
Property Group Briefing
Lease Guarantees and
their Enforcement
The downturn in the economy, has seen a dramatic increase in
clients coming to us for advice on their rights and obligations under
commercial leases and brought a renewed focus on lease guarantees.
This article explores the practical benefit and effect of lease
guarantees and the main commercial and legal considerations which
apply both to their negotiation and their enforcement.
Purpose of Lease Guarantee
A landlord’s primary commercial consideration in granting a lease is whether the tenant
has the means necessary to pay the rent and perform its obligations for the duration of
the tenancy. Of course it’s simply not possible for either party to predict this with any
certainty into the future and so in entering into a lease both parties do take on the risk of
non-performance. This risk is inherent in the landlord and tenant relationship as it is in
all contracts. But there is a level of risk beyond which it is institutionally recognised that
landlords should not reasonably be expected to accept. And so for example where the tenant
does not have a proven trading record, or is in a volatile industry, or its audited accounts
highlight potential future trading concerns, landlords, being then effectively “on notice” of
particular risk will generally and reasonably require that the tenant’s covenant is supported
in a way which offsets that additional identified risk.
The purpose of the guarantee is therefore to offset the particular risk identified at the outset
as attaching to the particular tenant and is not intended to, nor could it possibly, remove the
risk for the landlord inherent in the contract itself.
Key Elements for Commercial and Legal Agreement
This document contains a general
summary of developments and is not
a complete or definitive statement of
the law. Specific legal advice should be
obtained where appropriate.
It is often the case that the requirement for a guarantee is established after the commercial
terms for the letting are agreed so that no specific commercial consideration is given to the
terms of the guarantee. This effectively results in the landlord’s solicitor having a blank
canvas to put in place the broadest guarantee and indemnity possible in protection of the
landlord’s interests.
In principle a guarantee is enforceable on its express terms and so to balance this, ideally
from the guarantor’s perspective, it would have commercially agreed up front any
limitations on liability appropriate to the particular circumstances of the letting.
............................................................................................................................................
Earlsfort Centre, Earlsfort Terrace, Dublin 2, Ireland | tel: +353 (0)1 618 0000 | fax: +353 (0)1 618 0618 | email: [email protected] | web: www.arthurcox.com
02
The most usual limitations are:
»» for the guarantee to be limited to rent and other payments only;
»» for it to be released after a specific period, sometimes linked to the tenant meeting the standard institutional “profits test” or other trading milestone and sometimes not;
»» overall caps on liability (for example, that liability would not exceed two years rent and outgoings under the lease); and
»» for personal guarantors, express exclusion of recourse to
the family home.
Also of particular concern to a guarantor are the terms for
the release of the guarantee. Often the only circumstance in
which a landlord will openly offer release of the guarantee
is on a permitted assignment of the Lease but there are
other circumstances in which a guarantor would be likely
to seek to be released and for which the guarantee might
provide some flexibility, most notably, where the guarantor
is an individual, upon his/her death; or where a guarantor,
whether personal or corporate, severs their relationship
with or disposes of their interest in the tenant. In the
absence of some provision for release of the guarantee in
these circumstances the guarantor (including his or her
estate in the case of a deceased individual) has no legal right
to be released.
Enforcement
When faced with significant tenant default on the lease
terms, the first step for both parties will be to review the
express terms of the guarantee, to see what options are
provided for.
The landlord will be focussed on two things:
1. recovering the property; and
2. recovering the arrears and losses (including potentially the loss of the bargain depending on whether the guarantee provides for it).
Clearly the ability of the guarantor to pay arrears and
otherwise perform the obligations under the lease at the
point of enforcement will be critical in the consideration
of the enforcement options and ultimately to recovery of
any arrears and losses. The existence of a guarantee will
increase the landlord’s options in dealing with the lease
and arrears under it, but whether the guarantor has the
means at that time to pay the rent and is worth pursuing
in an action for recovery of arrears or specific performance
will need to be assessed at the time by the landlord. If the
guarantor does not have the means at that time to pay the
rent, it will simply not be worth pursuing the guarantor and
the landlord will instead have to focus on recovering the
property (by agreed surrender or forfeiture of the lease) and
minimising its loss.
Bankruptcy of a tenant or more usually the appointment or
potential appointment of a liquidator, receiver or examiner
to the tenant will also have a real practical bearing on
decisions taken by both parties in relation to the lease and
the guarantee and, importantly, can impose a timeframe
for the taking of those decisions, which the parties need
to be aware of. Crucially from both the perspective of
the landlord and guarantor, the disclaimer of a lease by a
liquidator to a tenant company, or by the official assignee
to a personal tenant in bankruptcy, does not impact on
liabilities of third parties, including the guarantor’s liability
pursuant to a guarantee. However the statutory framework
for examinerships imposes particularly onerous obligations
on landlords who wish to rely on lease guarantees.
Significantly, if a landlord, who receives notice of a meeting
of creditors to vote on a scheme of arrangement for the
tenant company in examinership, does not immediately
and most commonly at least within 48 hours, serve notice
on the guarantor of the meeting so as to allow the guarantor
to vote instead, the landlord loses its entitlement to rely on
the guarantee.
Where the guarantor is solvent and remains a real mark for
enforcement the options open to the landlord will include:
in the short term, maintaining the status quo i.e. not taking
any action in respect of the lease but demanding the rent
from the guarantor; and exercising a right, if it is an express
term of the guarantee, to require the guarantor to take on
the lease for the remainder of the term.
As enforcement of these options is however potentially
both time consuming and costly (and Courts lean against
ordering specific performance of obligations where
damages would be an adequate remedy) it is most often
the case that the real practical benefit and effect of these
options, and the strength and scope of the guarantee
in general, is in bringing the guarantor to the table to
negotiate a surrender of the lease and settlement of
liabilities (and thereby achieving the landlord’s objectives
of (1) recovery of possession of the premises and (2)
recovery of arrears and losses, to the extent possible). The
benefit of negotiating to both parties is of course that the
time and cost in achieving a negotiated agreement will be
much less than if the issues are litigated.
Recovery through the Courts
In the absence of an agreed settlement the most common
course of action for recovery of arrears or losses is to bring
proceedings for judgment for the amount of the debt. (This
action may of course be taken against the tenant and/or
the guarantor depending on the particular facts and can be
coupled with an action for recovery of possession if this is
also being resisted.)
If and once judgment is obtained, the usual methods of debt
recovery are available against the guarantor including:
»» having a judgment mortgage registered against land and buildings owned by the guarantor;
LEASE GUARANTEES AND THEIR ENFORCEMENT
NOVEMBER 2011
»» the sheriff seizing the guarantor’s personal property and assets for auctioning off in discharge of the debt; and
»» taking “garnishee” proceedings against the guarantor where it is known or likely that the guarantor is to receive a sum of monies so that those monies are effectively diverted to the landlord towards satisfaction of the debt.
Where the sheriff has found no goods available to discharge
the debt, a further process of examination by the Court of a
personal guarantor’s means, to assess and agree payment of
the debt by instalments is open to the landlord.
If the instalment order is not complied with, the landlord
can apply to the Court for a committal order, which is
an order for arrest and imprisonment. The maximum
imprisonment period is three months, but notably, the
imprisonment does not extinguish the debt.
Summary
In summary, lease guarantees do not eliminate the normal
risk inherent in a landlord and tenant relationship but,
while not a safety net for landlords in all circumstances,
do have a clear benefit in offering options in difficult
circumstances. They can also very clearly place significant
and potentially very onerous obligations on guarantors
which need to be carefully considered.
On a very practical level landlords, tenants and guarantors
are all particularly well advised to build and work on their
relationships as best they can from the outset and to be and
stay informed of issues affecting each other at all times to
the extent possible. Being informed (both at the commercial
level and also on the legal issues) and being confident in
the accuracy of that information ensures that arrears don’t
build and takes a lot of the pain out of ensuring that the
right action is taken in the particular circumstances in the
most cost effective way.
© Martina Firbank, Arthur Cox
Contacts
For further information on the developments outlined in this briefing, please contact:
Mark Barr Partner
Head of Property
+353 (0)1 618 0303
[email protected]
or your usual Arthur Cox contact.
Martina Firbank Associate
Property
+353 (0)1 618 0305
[email protected]
03
LEASE GUARANTEES AND THEIR ENFORCEMENT
NOVEMBER 2011
Dublin
Belfast
Earlsfort Centre, Earlsfort Terrace, Dublin 2, Ireland
tel: +353 (0)1 618 0000 | fax: +353 (0)1 618 0618
email: [email protected]
Capital House, 3 Upper Queen Street, Belfast BT1 6PU, Northern Ireland
tel: +44 (0)28 9023 0007 | fax: +44 (0)28 9023 3464
email: [email protected]
London
New York
12 Gough Square, London EC4A 3DW, England
tel: +44 (0)20 7832 0200 | fax: +44 (0)20 7832 0201
email: [email protected]
One Rockefeller Plaza, 15th Floor, New York NY 10020, USA
tel: +1 (1)212 782 3294 | fax: +1 (1)212 782 3295
email: [email protected]
www.arthurcox.com
04