Commercial landlords regularly encounter company tenants — limited companies that have limited liability for their obligations. Where a company tenant defaults on rent or other lease obligations and the company has insufficient assets, the landlord's only recourse without additional security is to the company. A personal guarantee from the company's director(s) creates additional personal liability — the director promises that if the company fails to perform its obligations under the lease, the director will perform them instead. Obtaining a properly drafted personal guarantee is one of the most important steps a commercial landlord can take to protect against company tenant insolvency or default.
What Is a Personal Guarantee?
A personal guarantee is a contract by which a guarantor (typically a company director, shareholder, or connected party) agrees to discharge the obligations of a principal debtor (the company tenant) if the principal debtor fails to do so. It is a form of secondary liability — the guarantor's obligation is triggered only by the default of the principal debtor. This distinguishes a guarantee from an indemnity, which is a primary obligation: the indemnifier is liable independently of the tenant's obligation and the indemnity survives even if the principal obligation is void, discharged, or unenforceable. Modern commercial guarantees typically include both a guarantee and an indemnity clause — the 'guarantee and indemnity' — to ensure the widest possible coverage. The Statute of Frauds 1677 s.4 requires a guarantee to be evidenced in writing signed by the guarantor; an oral guarantee is unenforceable.
- Secondary liability: guarantor is liable only on default of the principal debtor (company tenant) — not liable unless and until the tenant defaults
- Guarantee vs indemnity: guarantee is co-extensive with the principal obligation; if tenant's obligation is void, guarantee falls too. An indemnity is primary — survives invalidity of the underlying obligation
- Statute of Frauds 1677 s.4: guarantee must be in writing and signed by the guarantor or their authorised agent — oral guarantees are unenforceable
- Principal debtor clause: many commercial guarantees include a clause treating the guarantor as a principal debtor — making the guarantee closer to an indemnity and removing many technical defences
- Consideration: landlord's agreement to grant the lease to the company tenant is good consideration for the guarantee — existing consideration is sufficient
When Should a Commercial Landlord Require a Personal Guarantee?
A personal guarantee is most appropriate where the company tenant presents a financial risk that the landlord is not prepared to absorb. Key indicators: the company has a short trading history (fewer than 2–3 years of filed accounts); the company has limited net assets relative to the annual rent; the company is a newly incorporated special purpose vehicle (SPV); the lease is long-term (over 5 years) or the rent is high relative to the company's income; or the landlord has concerns about the company's financial resilience. Landlords should also consider whether to require a rent deposit (typically 3–6 months' rent held in a designated account, returned at lease end if no default) as an alternative or additional security to a personal guarantee. A rent deposit gives immediate access to funds without needing to pursue a guarantee claim through the courts.
- New or small company: company with short trading history, limited assets, or no filed accounts — guarantee from director essential
- SPV tenant: a newly formed company created specifically to take a lease with no other assets — PG from the beneficial owners mandatory
- Long-term lease: a 10+ year lease creates long-term exposure; the company's financial position in 5 years is uncertain — PG provides a backstop
- Rent-to-income ratio: where annual rent is a significant proportion of the company's annual turnover, default risk is higher — PG mitigates
- Rent deposit alternative: consider requiring a rent deposit (3–6 months' rent) held on trust — gives immediate access to funds without litigation
Key Terms in a Commercial Personal Guarantee
A well-drafted commercial personal guarantee should cover: the full scope of obligations guaranteed (rent, service charge, insurance, dilapidations — not just base rent); the duration (typically co-extensive with the lease term, including any holding-over period); the mechanism for demand (what the landlord must do before calling on the guarantee — usually a written demand specifying the default); a principal debtor clause (removing defences based on the secondary nature of the obligation); an anti-Holme v Brunskill clause (ensuring lease variations do not release the guarantor — Holme v Brunskill (1877) 3 QBD 495 held that a material variation of the principal contract without the guarantor's consent releases the guarantor); and provisions dealing with the guarantor's subrogation rights (their right to step into the landlord's shoes on payment).
- Scope: guarantee all lease obligations — rent, service charge, insurance, dilapidations, and other covenants; not just base rent
- Duration: should be co-extensive with the lease, including any holding over period and any extended term if the lease is renewed under LTA 1954
- Anti-Holme v Brunskill clause: prevents the guarantor being released if the landlord and tenant vary the lease without the guarantor's consent — essential in any commercial PG
- Principal debtor clause: removes defences based on secondary liability (e.g., creditor failing to pursue principal first; release of principal; variation of obligation)
- Demand mechanism: guarantee typically payable on written demand by the landlord specifying the breach — landlord must send formal demand before suing on the guarantee
Authorised Guarantee Agreements (AGAs) on Assignment
Where a commercial tenant assigns their lease, the Landlord and Tenant (Covenants) Act 1995 (LT(C)A 1995) provides that the outgoing tenant is released from future obligations — unlike the old law under which original tenants remained liable throughout the term. However, the landlord can require the outgoing tenant to enter into an Authorised Guarantee Agreement (AGA) under LT(C)A 1995 s.16 — an agreement by the outgoing tenant to guarantee the performance of the immediate assignee's obligations. The AGA only covers the immediate assignee; if the assignee subsequently assigns again, the original outgoing tenant's liability under the AGA ends. A guarantor of the original tenant's obligations may also be required to provide an AGA guaranteeing the original tenant's obligations under their AGA.
- LT(C)A 1995 s.16: AGA mechanism — landlord can require outgoing tenant to guarantee the immediate assignee's obligations as a condition of consent to assign
- Duration: AGA liability ends when the immediate assignee assigns again — the original guarantor's AGA liability also ends at this point
- Scope: AGA can require the outgoing tenant to perform or guarantee all obligations that the assignee would be obliged to perform
- Guarantee of AGA: a guarantor of the original tenant may be required to guarantee the tenant's AGA obligations — creating a chain of guarantees
- Cannot exceed tenant's obligations: LT(C)A 1995 s.16(4) — AGA is void to the extent it goes beyond guaranteeing the assignee's obligations
Enforcing a Personal Guarantee and Scotland
To enforce a personal guarantee, the landlord must first make a written demand on the guarantor, specifying the amount of the default and the basis for the claim. If the guarantor does not pay, the landlord can issue proceedings in the county court (for sums up to £100,000) or the High Court. The guarantor may raise defences including: the guarantee was not in writing (Statute of Frauds); the lease was materially varied without consent (Holme v Brunskill — if no anti-avoidance clause); the principal debt has been paid or discharged; or the demand was not made in the required form. In Scotland, the Requirements of Writing (Scotland) Act 1995 requires guarantees to be constituted in writing — the equivalent of the Statute of Frauds. Scottish commercial guarantees follow the same general principles but are governed by Scots contract law.
- Written demand: send a formal written demand specifying the amount and the basis of the claim before litigating — failure to demand properly may be a technical defence
- County court vs High Court: claims up to £100,000 in county court; above £100,000 in High Court Commercial Court or Business and Property Courts
- Guarantor defences: Statute of Frauds (not in writing); material variation without consent (if no anti-Holme clause); discharge of principal; defective demand
- Limitation period: Limitation Act 1980 s.5 — 6 years from date of demand; guarantee claim is a simple contract claim unless under seal (deed — 12 years)
- Scotland: Requirements of Writing (Scotland) Act 1995 — guarantees must be in writing; same general enforcement principles apply under Scots contract law
Frequently asked questions
What is a personal guarantee in a commercial lease?+
A written commitment by an individual (typically a company director) to be personally liable if the company tenant defaults on its lease obligations. It is a contract of secondary liability — the guarantor becomes liable on the company's default. The Statute of Frauds 1677 s.4 requires the guarantee to be in writing and signed by the guarantor.
What is the difference between a guarantee and an indemnity?+
A guarantee is secondary liability — the guarantor is only liable if the principal debtor (company tenant) defaults, and the guarantee is co-extensive with the principal obligation (if the tenant's obligation is void, the guarantee falls with it). An indemnity is primary liability — the indemnifier is independently liable even if the underlying obligation is void or unenforceable. Modern commercial documents typically include both a 'guarantee and indemnity' clause.
Can a lease variation release a personal guarantor?+
Yes — at common law, a material variation of the lease by the landlord and tenant without the guarantor's consent may release the guarantor (Holme v Brunskill (1877)). Commercial guarantees should always include an anti-Holme v Brunskill clause confirming that the guarantor's liability is unaffected by any variation of the lease. Landlords should check this clause exists before agreeing any lease variation.
What is an Authorised Guarantee Agreement?+
When a commercial tenant assigns their lease, under the Landlord and Tenant (Covenants) Act 1995, the landlord can require the outgoing tenant to enter into an AGA — guaranteeing the performance of the immediate assignee's obligations. The AGA liability ends when the immediate assignee assigns again. It is a specific statutory mechanism distinct from a general personal guarantee.
Does personal guarantee law apply in Scotland?+
Yes — the Requirements of Writing (Scotland) Act 1995 requires guarantees to be constituted in writing in Scotland (equivalent to the Statute of Frauds). Scottish commercial guarantees follow the same general principles (secondary liability; co-extensiveness; demand before enforcement) but are governed by Scots contract law. Take specialist Scottish legal advice for Scottish commercial leases.