Landlords, lenders & personal guarantees

A recent case highlights the importance for lenders and landlords to obtain sufficient assurance that an individual entering into a guarantee agreement has received independent legal advice.

Lease obligations

The court held that the personal guarantee entered into by a company’s “sales director” (though not a statutory director) in relation to the company’s lease obligations was unenforceable because it had been entered into as a result of undue influence by a third party.

The individual, who regularly witnessed documents for one of the board directors, only saw the signature page of the agreement and thought he was signing as a witness. The court held that he had been misled by the board director and that this amounted to undue influence even though it was not caused by the landlord.

The landlord should have made sufficient enquiries to satisfy itself that the individual understood the terms of the agreement and, if he had, would have realised that this was not the case.
[see Trustees of Beardsley Theobald’s Retirement Benefit Scheme v Yardley for more detail.]

Action for landlords and lenders

In this case, the court’s sympathy for the individual produced a particularly harsh result for the landlord, but there are practical steps that a landlord or any lender seeking security by way of a personal guarantee can take to ensure that the security is enforceable:

• You should seek written confirmation from the guarantor that he has sought independent legal advice, is willing to act and understands the agreement and the potential risks.
• You should carry out a credit check or other financial check on the proposed guarantor. A guarantee is worthless if the guarantor does not have sufficient means to pay.
• If the guarantor holds himself out as a director of the company, you should use Companies House online search facility to confirm that he is a statutory director.

Actions for tenants

• You also want to make sure that the guarantee is enforceable. Otherwise, in an event of default, the landlord could take action against the tenant which could have been avoided had the guarantee been relied upon.