Where a company or trader has a short or poor trading history, A landlord should put protection in place to minimise the risk of a tenant defaulting. It is not just loss of rent that a landlord should be concerned about but also the costs involved in getting the property back into a state that a new tenant will be prepared to take on.
Careful investigation of all tenants should be carried out before the new tenant signs up.
These (unlike guarantees) provide a pot of money easily accessible to the landlord. They are usually set out in terms of a number of months’ rent (varying between one and twelve in the current market). The precise terms of how the money is held can make a significant difference to the tenant.
If faced with a troublesome tenant, care must be taken to maximise the protection of the landlord. It might not be appropriate to use the rent deposit when there are other, equally effective ways of getting the tenant to pay up. Tenants must also be aware that landlords usually have several options when it comes to enforcing payment, some of which are potentially more stressful and embarrassing than using a rent deposit.
Whilst these do not have the cash flow implication of a rent deposit the potential for a landlord to recover all of its costs should a tenant default are that much greater here – assuming the guarantor has sufficient assets of its own. Landlords need to satisfy themselves of this and of how easy it will be to enforce a guarantee if assets are based abroad. Guarantees are commonly put in place where a tenant assigns a lease that was entered into after 1995.
There are however certain procedures which are time critical that must be followed before a Landlord can claim from a guarantor.