Why guarantors are sometimes more important than tenants...
Article Posted - 19th August 2019
In this guest blog, Alex Cook, Partner at Helix Law explains why sometimes the guarantor can be even more than the tenant themselves...
Being a landlord or property investor has arguably never been more fraught with challenges and risk. Barely a week goes by without another update or legal change landlords and letting agents have to grapple with.
Many landlords in the private rental sector (PRS) may be forgiven for feeling more than a little under attack. But even if you get all of this legislation right you will still need to go through a lengthy court process if there are problems. At the end the landlord will only get a court order for possession and any rent arrears, damages and costs that are due to them. If the tenant has no money, no job and no assets, the court order is just a piece of paper. Typically a landlord could have lost the equivalent of three to nine months' rent, have a damaged property and incurred legal costs.
The tenants may have looked promising at the outset but life events can quickly change. Few landlords really think about the risk of their tenants' circumstances changing when letting a property, and in the haste to get a tenant in, it can be easy to forget about how the tenant could pay for any damages if they lose their job. Following the correct legal procedure helps but it leaves credit risk.
The worst case scenario
Mortgage companies have no interest in whether or not tenants pay rent; they expect their mortgage payments regardless.
If tenants do default on the rent landlords do have legal recourse, but the problem can worsen not least because tenants will often qualify for legal aid and then defend the landlord's claim. Even in claims where the defence is ultimately found to have no merit I have seen landlords acting in person doing it themselves only be faced with a legal aid funded barrister and solicitor against them acting for the tenant, even where there were months of arrears.
Even where a landlord ‘wins', their (your) costs are not recoverable if the tenant is funded by legal aid, and so you recover your property but you've incurred costs you cannot recover even though you were right all along. It can all feel incredibly unfair, and expensive, but that's the reality in many of the circumstances I see on the front line.
Step forward - the guarantor
Let's be clear, a guarantor is just one way of minimising risk. Having a guarantor isn't a magic or silver bullet and there is no such thing. What a guarantor offers however is an incredibly effective way to lower your risk profile when letting property, at virtually zero cost to you, or to the tenant. A guarantor is only as good as the assets behind that guarantor.
So really when I'm referring to a guarantor I mean ‘someone with assets'. A house. If they have no house then a reliable income stream from stable employment. Someone with some skin in the game. If you have a guarantor you are more likely to convert a court order into money. If the tenant defaults on the rent or causes disrepair in your property, the guarantor can be pursued in their place. Suddenly it matters less that the tenant has no assets; you can also recover your legal costs from the guarantor.
The time taken is frustrating, but you can have greater confidence in ultimately recovering your losses. If the court case takes a year to win and the costs are thousands of pounds, where you have a guarantor with sufficient assets, you are still getting the full rent and costs. The value of this can be very significant in monetary terms. In fully litigated disputes it isn't unusual for landlords to incur costs of thousands of pounds plus the unpaid rent. Being able to recover those losses is incredibly powerful. And it doesn't end there.
Far more subtly important in any dispute is leverage. A guarantor shifts the balance and makes it a fairer fight. Guarantors are most commonly relatives - they have some sort of relationship with the tenant. That can also provide very significant leverage in the form of encouragement for the tenant to leave; for them to pay the rent they owe and to leave the property in a good condition. Basically, a guarantor gives you another person, often with the ear of the tenant, encouraging them to act in accordance with the AST as they promised to do in the first place.
So what is required?
In simple terms a guarantee is a contract and must be in writing. Preferably that contract will be a deed (a contract that needs to be witnessed). The guarantee should repeat the content of the AST and include that the guarantor has seen the AST and is agreeing to guarantee and indemnify the landlord in relation to all obligations the tenant enters into within the AST. Basically the guarantor is offering and agreeing to stand in the shoes of the tenant if necessary.
Technically it's important that the guarantee follows the AST, not the other way around because the guarantor is guaranteeing the tenants' obligations. If there are no tenant obligations at the point the guarantee is signed, that can create legal uncertainty. The guarantee should also include an indemnity of the landlords costs if anything goes wrong and the landlord needs to instruct me, or someone like me.
Getting the content of the guarantee absolutely right is obviously important in this context. The NLA provide a template for members. There is no need to register or do anything further other than to keep the guarantee available in case needed. Most of the time you won't need it, but if you do you'll be happy to have it.
Of course we have to accept there are limits to guarantees, and to the effectiveness of guarantors. Their assets can change over time and the agreement needs to be sufficiently technically robust. Guarantors can go through hard times themselves and their solvency can change. But it's easy to overstate the likelihood of these happening. Homeowners move less often than tenants and the likelihood is that a guarantor will still have assets available even if they do move. It's also hard to overstate how effective having a guarantor to pursue can be for a landlord if litigation becomes necessary.
Lower your risk
I deal with portfolio landlords and companies who won't let their property without a guarantor. They would rather have a void or accept below market rent to attract a tenant with a guarantor – less risk lower rent.
Of course I recognise that obtaining a guarantor isn't always possible in every geographic area or housing market. There can be significant regional variance and as a landlord your target tenant market might mean that guarantors are unlikely to be obtainable, but the key point here is that guarantors are another very effective way for you to reduce your risk as a landlord.
I only deal with litigation and disputes acting for landlords and property investors as individuals or companies across the country, and that's why I strongly advocate landlords seeking to obtain one wherever possible.
Alex Cook, Partner
Join the NLA
The NLA is the UK's leading association providing support for private residential landlords, serving over 40,000 members nationwide. New landlords join the NLA for advice, information and guidance and to keep up-to-date with fast changing laws and regulations.
Join today and receive instant access to a wide range of key landlord services, award-winning resources and exclusive supplier discounts.Become a member