Challenging guarantees for tenancies

Some types of contracts are secured by a guarantee. A guarantee is an agreement entered into between a creditor and a guarantor. The guarantor promises to pay the debt of another person if they fail to pay.

The principal debtor is the person or company who receives the benefit of the agreement. They might receive funds under a loan agreement, or tenancy rights for a rent guarantee.

A guarantee is a form of surety, like an indemnity, or a bond. It is not a credit agreement in its own right. The guarantor does not receive any payment for providing the surety.

Guarantees are commonly used for private tenancies and for some bad credit loans. Business borrowing could be secured by a personal guarantee from someone in the company, such as a director.

When does the guarantor have to pay?

The creditor has to call the guarantee in before the guarantor becomes liable under the agreement. How and when the creditor can call in the debt depends on the terms of the agreement.

When the creditor has called in the guarantee under the terms of the agreement, the debt has crystallised. The creditor can enforce the guarantee agreement as though the guarantor is the principal debtor.

Guarantor's insolvency

A guarantor who applies for bankruptcy, an IVA, or a debt relief order, could have their guarantee liability written off in their insolvency.

For bankruptcy and IVAs, the whole amount is included whether the guarantee has been called in or not. For debt relief orders, the guarantee is only included if the guarantee has been called in. This is because it is a contingent liability.

Read more about contingent debts in insolvency.

A guarantee agreement must be in writing and signed by the guarantor.[1] Electronic signing is permitted.[2]

An exchange of emails may constitute an agreement in writing if they are signed by the guarantor or a person authorised by the guarantor.[3]

Execution as a deed

Where the tenancy pre-dates the guarantee, the guarantee must be drawn up and executed as a deed. This applies whether or not the tenant has moved in. The valid execution of a deed imposes the following formal requirements:[4]

• the document must make it clear that it is intended to be a deed

• it must be signed by the guarantor

• the guarantor’s signature must be witnessed at the point of signing

The absence of a date does not invalidate a deed.[5]

Joint guarantors

If the guarantee names more than one person as the guarantor, they must all sign it. Failure to do so means it is not binding on any of the named individuals, including any who have signed.[6]

If all the joint guarantors have signed, they may be pursued individually or jointly.

Most guarantees for tenancy agreements cover unpaid rent and damage to the property. The guarantee only covers liabilities specified in the guarantee agreement, so if the agreement only mentions rent arrears it does not cover damage to the property.

The guarantor’s liability cannot exceed that of the tenant. The guarantor should check whether the tenant has a defence to money owed, or a claim against the landlord, for example:

• disrepair at the property

• a claim for a breach of the rules relating to tenancy deposits.

A guarantor cannot bring a claim for a breach of tenancy deposit protection rules unless they have paid the deposit on the tenant’s behalf.[7] If the tenant brings a successful claim it can be set off against arrears and reduce the guarantor’s liability.

Variations and new tenancies

The guarantee liability is confined to that in the initial tenancy agreement unless expressly stated. If the tenancy is for an initial fixed term with no express provision for it to continue afterwards, the guarantor liability will end. Any variation to the guarantee must be agreed by the guarantor. Otherwise, the guarantee will only be enforceable if the variation is ‘self-evidently insubstantial or non-prejudicial’.[8]

Increases in rent may be enforceable if the tenancy contains a rent review clause and the guarantee specifies rent due ‘under the tenancy’ (or similar).[9] If a fixed term assured or assured shorthold tenancy expires and becomes a statutory periodic tenancy then a rent review clause in the fixed term agreement no longer applies.[10]

Unfair terms

Consumer contracts include tenancy agreements, and by extension guarantor agreements for tenancies. [11] This means rules about unfair terms apply. Government guidance for lettings professionals explains how the terms in tenancy agreement relating to a guarantor must be 'fair'.[12]

Where the tenancy agreement allows for a new contractual fixed term or periodic phase, the wording of the guarantee should be checked to determine whether the liability continues.

If the guarantee does allow variations, including rent increases or a contractual periodic tenancy, the court may release the guarantor from any additional liability if it substantially exceeds the amount they initially agreed to.[13]

If the guarantee purports to cover ‘any extension or variation’ to the tenancy this may be an unfair contract term, and unenforceable.

Other terms may be regarded as unfair if they:

• extend the tenancy automatically without giving the tenant enough chance to end it[14]

• alter the terms of the tenancy without a valid reason which is specified in the contract[15]

• claim large default sums if the tenancy is breached[16]

If the court finds that a term in a tenancy agreement or a guarantee is unfair, that term is not binding on the guarantor, but the agreement is still enforceable as if the unfair term did not exist.[17]

The Tenant Fees Act 2019 applies to guarantors for tenancy agreements.[18] This limits the rate of interest on unpaid rent to 3 per cent above the Bank of England base rate.[19]

A landlord or agent accepting a guarantee is automatically on notice that a guarantor may be pressured or coerced into agreeing.[20] This is sometimes referred to as ‘constructive knowledge’.

A guarantor’s defence of undue influence is more likely to succeed if the:

• tenant had a dominating influence over the guarantor

• guarantor was not given an opportunity to consider their decision

• guarantor did not have the benefit of legal advice

• guarantor is vulnerable or has difficulty managing their affairs

If a court decides a guarantee was obtained by the undue influence of the tenant, it will be rescinded (set aside).

The guarantor may issue a claim for a declaration from the courts that the guarantee was obtained by undue influence. The claim is made under Part 8 Civil Procedure Rules. There are costs associated with issuing the claim, and the guarantor may have to pay the landlord’s legal costs if the claim is not successful.

The guarantor could defend a money claim on the basis of undue influence. The costs are likely to be lower in amount, and if the claim is allocated to the small claims track, the guarantor will not normally be liable for the landlord’s costs.[21]