Commercial Lease – Guarantee

lease-stone

In New Zealand it is very common for a business operator to enter into a lease arrangement with the lessor or landlord. This is commonly done at the stage of agreement to lease and also in the  actual  deed of lease. This weeks White paper is authored by Queen City Law Senior Associate John Jon, an expert in commercial and property law. To read and download the complete article as a PDF click here.

To read more about John click here, to read more articles by John Jon click here.QCL-MEDIA-SHOOT_final-jon

The most commonly used form is the Auckland District Law (ADLS) Society form where the lessor normally will require the lessee or tenant to provide guarantee(s) if they believe the lessee is not able to satisfy credit check requirements  or if  the tenant is adopting a limited liability company vehicle – however, public listed companies will not normally be asked to nor will provide any personal guarantee.

Accordingly, the guarantor must carefully weigh up its potential exposure under the lease documents to ensure that they make an informed decision and understand the legal implications behind this document.  For your information, we attach herewith a page from the sixth edition of deed of lease form issued by ADLS. Without going into too much detail, you will be able to see that the guarantee will not be released on an assignment of the lease or  upon any rent review contained therein.

Therefore, it is important that you or your legal advisor negotiate the guarantee terms before you enter into any formal agreement.  While it may be a bit problematic or impractical for any lessee or guarantor to negotiate the terms with the lessor, it can be critically important that you make every effort to limit the scope of your personal guarantee obligations .

Queen City Law strong advise you to engage a commercial lawyer early in the process. To contact our commercial law team click here.

These are the questions that the guarantor should ask before he/she decides to proceed with any such guarantee:

  1. Why do I need to provide any guarantee?

  1. What are the terms and conditions under this guarantee?

  1. Have I taken independent legal advice?

  1. What can I do to limit or reduce my guarantee?

The followings are non-exhaustive proposals that you may wish to negotiate with the lessor:

  1. Release of guarantee upon assignment – provided that there is no lease breach at the time of assignment

  1. Limit your personal guarantee to a specific sum – e.g. 3 months’ rental and outgoings

  1. Release of guarantee after a certain  further  period, if there  is for example  no breach under the lease

  1. An option of using bank guarantee or bank bond in lieu of your personal guarantee

  1. You should have an express covenant requiring the landlord to provide the guarantor with a copy of all notices served by the lessor on the tenant – This should include any continuous or persistent breach under the lease

  1. There  could  be a provision for the lessor to seek legal remedies against the current tenant and inform the guarantor  before exercising its rights against the guarantor

  1. The lease should contain a provision for the guarantor to take back the lease if the assignee/current lessee has defaulted under the lease allowing the guarantor to mitigate its loss in the event of such breach

  1. The lease should also contain provisions requiring the lessor to cooperate with the guarantor when the guarantor enforces its rights against the defaulting lessee

In many ways it can be an investment to get sound legal advice before signing An Agreement to Lease or Deed of Lease although many people do not  and the result can be disastrous. When a business is sold such modifications can be invaluable – it may also mean no nasty and sometimes costly and unexpected  surprises down the line.

 If you have questions about your current lease or are looking to enter into a new lease agreement don’t hesitate to contact us.