Mike's Personal Guarantee
By Jenny Barker
Mike and Melissa’s company leased warehouse space in Albany. Mike had provided a personal guarantee when they signed the lease. The business was growing and in 2018 they needed to move to a larger space. The Albany lease had two years to run so Mike and Melissa contacted their agent and found a new tenant to take over the lease. The landlord agreed to the assignment and a deed of assignment was signed with the new tenant. Mike and Melissa’s company moved out and the new tenant moved in.
Twelve months later, Mike and Melissa received a letter from the landlord saying that the new tenant had not been paying rent for six months and had now gone into liquidation. The letter also stated that Mike and Melissa’s company was responsible for paying the outstanding rent.
Mike and Melissa were confused. They thought they were clear of any responsibility under the lease. If the landlord was holding them responsible, why wasn’t the landlord obligated to tell them earlier about the new tenant not paying rent?
Mike and Melissa called their solicitor. Unfortunately for Mike and Melissa, their company was liable to pay the outstanding rent. Under a standard deed of lease and deed of assignment an original tenant remains liable to the end of the lease term. Fortunately for Mike and Melissa, there were no costs for premises damage, maintenance or reinstatement (returning the premises to the condition they were in at the start of the lease), otherwise these would have been added to the outstanding amount.
To avoid this situation in the future their solicitor recommended that before assigning a lease they should always investigate the financial situation of any potential assignee tenant. This may include requesting copies of financial statements, references, Companies Office checks, credit checks and considering the tenant’s business experience and assets.
In addition, at the time the lease is assigned, it may be possible for the original tenant to negotiate with the landlord to release or limit the original tenant and/or guarantor’s ongoing liability. For example, if the new tenant provides their own guarantor the existing guarantor could be released from their guarantee immediately or after a 6 or 12 month period.