Guarantees in Lease Agreements: Enhanced Security for Rental Transactions

by Bruno Simão, CEO of Bruno Simão Law

This article is one of a series of 3 articles by Bruno – here are the link to the other 2 articles in the series:

• Sureties in Lease Agreements: Key Considerations and Legal Essentials
• Co-Signatories in Lease Agreements: A Practical Alternative to Suretyships

While sureties and co-signatories are well-known in lease agreements, guarantees remain an underutilized yet highly effective tool for landlords. A guarantee offers a unique advantage by ensuring payment even if the tenant defaults, irrespective of the tenant’s circumstances or disputes. Guarantees are particularly useful in high-value rentals or in cases where landlords seek added financial protection. In this post, we’ll delve into the benefits of using guarantees in lease agreements and why they might be the right choice for your rental property.

What Is a Guarantee?

In the context of a lease, a guarantee is a promise by a third party—typically someone with a vested interest in the tenant’s success, such as a family member, employer, or business partner—to cover the rent or damages if the tenant defaults. Unlike sureties, which are contingent on the tenant’s responsibility, guarantees remain enforceable regardless of any issues between the tenant and landlord.

For landlords, a guarantee is particularly appealing because it provides a higher level of security. It’s less likely to be contested in court and is less vulnerable to legal challenges if drafted correctly. This stability can make guarantees a preferred choice in scenarios where the tenant’s financial reliability might be uncertain.

Key Benefits of Guarantees

1. Non-Contingent Security: Guarantees are not tied to the tenant’s performance or disputes; they remain enforceable as long as the lease terms are followed. This provides the landlord with assured recourse, even if the tenant has legal defenses that might impact the claim under a suretyship.
2. Less Room for Disputes: Unlike sureties, which can require advanced electronic or wet ink signatures and may be invalidated if improperly executed, guarantees are simpler to enforce. This clarity reduces the likelihood of drawn-out legal battles.
3. Increased Peace of Mind for High-Value Leases: For properties with substantial rental costs, having a guarantee in place allows landlords to take on tenants who may otherwise seem financially borderline or uncertain.

Practical Uses of Guarantees in Leasing

Guarantees are particularly useful in the following cases:

• Luxury or high-value rentals: For properties with significant rental obligations, a guarantee provides an added safety net.
• Tenants with an unstable or emerging credit history: Young professionals or individuals in transition may be excellent tenants but lack the solid credit history some landlords require. A guarantee can provide the assurance needed to approve these tenants.
• Corporate leases: When a company rents a property for an employee or executive, a guarantee by the employer can simplify the process and reduce risk.

Key Considerations for Drafting a Guarantee

To ensure the enforceability of a guarantee:

• Specific Wording: Guarantees must be carefully worded to avoid any ambiguity. If the language too closely resembles that of a surety, it could be reclassified as a surety by a court. Clear terms that distinguish it as a guarantee are essential.
• Customization for the Lease: Each guarantee should be crafted specifically for the lease in question. This bespoke approach ensures that the guarantee aligns precisely with the rental terms and avoids any potential loopholes.

When to Choose a Guarantee Over Other Options

While a guarantee provides a high level of security, it is generally best suited for situations where:

• The property’s value is substantial: Guarantees work well with high-stakes properties where landlords may need more robust protection.
• The tenant’s financial situation is variable: Guarantees can be advantageous when renting to tenants with variable or emerging incomes, such as freelancers or entrepreneurs.
• Other security options have proven inadequate: If past tenants have failed to meet obligations under sureties or co-signatories, guarantees provide an alternative approach with less risk of legal challenge.

Conclusion

Guarantees offer a powerful option for landlords and agents who need extra security in rental agreements. As a non-contingent form of protection, guarantees provide a robust safety net while avoiding some of the legal complications associated with sureties. While still uncommon in residential leases, they are a mainstay in commercial leasing, where security and stability are paramount.

This valuable option was covered in a recent RentalSphere webinar alongside co-signatories and sureties, where I joined Shaun Luyt to explore these topics in-depth. Initially exclusive to members of the Rental Training Club, we are now making this critical information available for purchase to non-members, given the demand and importance of these topics.

For those interested in learning more about how guarantees could enhance your leasing strategy or if you need assistance drafting legally sound guarantee agreements, don’t hesitate to contact BSA Law.

Please note that this is part 2 of a 3 part series. Click here to read part 1 on sureties and please make sure to subscribe to our mailing list to be notified when parts 2 & 3 are published and/or get notified when we post new articles. Simply click here to join.

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Disclaimer: This article provides general information and is intended for educational purposes only. It should not be construed as legal advice. For advice on specific legal matters, please consult directly with the author or a qualified legal professional.