A Landlord's Best Friend

In the current economic climate tenants may begin to fall behind with their payments (or worse go into administration or bankruptcy). Who (or what) is a landlord's best friend to protect against the risk of rent arrears? Here are the candidates:

A Rent Deposit

This is a sum of money provided by the tenant at the start of the lease (usually equal to one or two quarters' rent). It is held in a deposit account and can be accessed by the landlord if the tenant misses a rental payment.

This is a useful short term protection for the landlord. The main benefit is to enable the landlord to forfeit the lease; remove the tenant; and attempt to relet. The landlord can continue to draw money from the rent deposit account even if the tenant has been thrown out for non-payment of rent.

Directors' Guarantees

These are used when the tenant is a company and the landlord wants someone else to sue if the company doesn't pay the rent. In theory these can be a useful protection but in practice landlords (despite taking up references for the tenant) frequently forget to look into the financial position of the directors to establish whether their guarantees are worth anything.

Parent Company Guarantee

Major PLCs often use a subsidiary to enter into leases to keep the liabilities under their leases separate from the trading arm of the business. Landlords should be alive to the fact that this subsidiary may have no assets even if the tenant is a household name. In those circumstances, it is essential that the parent company stands as guarantor. An excellent protection provided the parent company is financially sound.

A Former Tenant

This is often overlooked by landlords. If a lease is sold on then the tenant selling the lease is often required to provide an Authorised Guarantee Agreement (AGA). Essentially an AGA is the same as a directors or parent company guarantee except that liability under the guarantee ends if the tenant taking over the lease subsequently sells it on. This is a useful protection provided the landlord remembers when it drops away.

References

Taking up references should be the landlord's first step when considering a new tenant. By far the most important reference is the bank reference. The landlord should write to the tenant's bank explaining the nature of the commitment the tenant is considering (ie rent and term of the lease). The bank will then reply stating whether or not the tenant is considered 'good' for the purpose of the landlord's enquiry.

So who (or what) is a landlord's best friend? The first four 'friends' are all designed to protect the landlord against a tenant who cannot pay the rent but surely the best protection of all is to find a tenant who can provide references that show it is financially sound and therefore is not likely to fall into arrears in the first place?

Landlords needing advice on landlord and tenant law, help in drawing up or negotiating lease agreements should contact Steve Petty of Cousins Business Law on 01926 629005.

This article is not intended to constitute legal advice, nor is it intended to be a complete and authoritative statement of the law, and what we say might be out of date by the time you read it. You should always seek legal advice to confirm whether or how any information in this article applies to your particular situation. We offer a free 30-minute telephone advice session to discuss your particular circumstances.

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