Guarantee Wording Benefits Director Guarantor

It is common that where a lease is sublet or where the lease is to a company, a guarantee arrangement will be put in place whereby the former tenant or a director of the lessee company guarantees performance of the lease.

In the event that the tenant fails to pay the rent, the landlord can then seek to recover the unpaid rent from the guarantor.

A recent case looked at the position arising when a landlord sought payment of rent from the director of a tenant company when the tenant failed to pay a sum in excess of £11,000. The landlord served a statutory demand on the director guarantor, the effect of which, if left undefeated, would be that the director could be made bankrupt if payment were not made within 28 days.

Although the lease required the tenant to pay the rent ‘without deduction or set off’, the director applied to the court to have the demand set aside on the ground that the company tenant had a good counterclaim against the landlord. The rules relating to statutory demands list a counterclaim as one of the reasons a statutory demand can be resisted. However, the guarantor did not have a counterclaim against the landlord.

The director argued that the court should use its discretion to set aside the statutory demand, because it was unjust that he should face bankruptcy in such circumstances.

The court agreed, because the wording of the guarantee was not for the director to pay the rent: it was for the director to make sure the tenant discharged its obligations and to make good any shortfalls. Had the wording of the guarantee been different, the result might have been also.