A guarantor is a term commonly used in financial terms and is used in many different situations. A guarantor is an individual who agrees to accept liability for payments if they are not made by the person who takes out the agreement. Typically these agreements involve loans, finance and tenancies.
A guarantee agreement is a written agreement in which the guarantor will assume responsibility along with the principal debtor under the contract with a third party such as a bank, landlord or other lender. If the main debtor fails to keep up repayments, the guarantor will be personally liable.
If however a contract is amended in material terms the obligations of the guarantor will be discharged, but the main debtor is still entirely liable for the full amount of debt.
When a performance guarantee is in place, this usually involves some kind of contract drafted by a bank to guarantee the payment or repayment of the debt owed if there is any default by the main debtor.
A Guarantor in Letting Property
Sometimes when tenants rent property the landlord or letting agent will require a guarantor as security to confirm that if the rent is not paid by the tenant, the guarantor will meet the payments and become liable for the debt.
Guarantors are usually requested in the following situations:
- Where tenants are in receipt of benefits such as housing benefit
- Tenants with a poor credit rating or those who cannot produce satisfactory references
- If the landlord has reservations that the tenant will have difficulty making the monthly rental payments
Guarantors themselves usually have to meet certain criteria that the landlord or letting agent is happy with.
Typical criteria include:
- A resident of the U.K.
- Ideally a homeowner
- Passes the credit check with the main credit referencing agencies
There may also be affordability tests to make sure that the guarantor can meet the rental payments if the tenant defaults.
In some situations where a landlord wishes to rent out their investment property, the credit check and application process may have revealed something about the tenant. This information may increase their risk perhaps because their credit score has revealed some missed payments or they have moved house quite a lot in recent months. The risk can be reduced if the tenant can provide a suitable guarantor who will agree to make the rental payments if the tenant defaults.
When an individual agrees to be a guarantor they must also enter into a tenancy agreement even though they will not be living at the property. The guarantor assumes the same obligations as the tenant in terms of payment. However in a tenancy agreement the guarantor obligations extend much further than simply paying the rent in the event of a default by the tenant.
Guarantors may also have to cover the costs of any damage caused to the property and other obligations which are defined in the tenancy agreement and/or lease.
The guarantor is legally obliged to fulfil their legal liabilities if they accept the responsibility of acting as guarantor. Failure to comply could result in legal action and further costs. In addition a guarantor must be acceptable to the landlord, meeting a set of criteria established for guarantors.
If a potential tenant has found someone to act as guarantor for them, the guarantor should be subject to exactly the same checks as the tenant including income, employment and credit searches. If the tenant does require a guarantor and their referencing is acceptable, letting agents or landlords may ask to meet with the guarantor face to face so they can explain exactly what is involved. Being a guarantor for someone is not a decision to be taken lightly.
Once everything has been explained to the individual and they still wish to proceed as a guarantor they should be asked to sign a Deed of Indemnity. However if the guarantor signs the tenancy agreement before the tenant then a Deed of Indemnity is not necessary.
Some landlords and letting agents require guarantors to be homeowners because it could be easier to recover the debt against the assets of the guarantor. It is easy to determine whether a guarantor is a homeowner simply by conducting a search with the land registry on their website.
A guarantor for a mortgage
In some instances those applying for a mortgage may be asked for a guarantor although this is now less likely. Usually a guarantor mortgage is taken out when the main applicant cannot secure a conventional mortgage themselves.
This could be for a number of reasons including:
- Poor or non-existent credit rating
- Inadequate employment history
- Insufficient funds to pay a deposit
Guarantor mortgages are popular amongst students or first time buyers who find it increasingly difficult to provide a satisfactory income or save up the required amount for a deposit due to increasing house prices. Where a guarantor agrees to enter into a guarantor mortgage they must have sufficient assets and income for the mortgage.
When it comes to rights, the guarantor usually has very little in a mortgage unless this is clearly stated in the agreement. A guarantor will have no interests or rights in the property, but they will be held accountable if the mortgage payments are not made. Therefore a guarantor should think very carefully before entering into any agreement.
It is also recommended that you seek independent legal advice if you are considering acting as a guarantor for a mortgage. The lender could make you fully accountable for the mortgage debt if the homeowner fails to pay. Furthermore, if legal proceedings are stated for mortgage arrears the guarantor may find that they are it only liable for the mortgage debt but also the legal costs associated with recovering the debt.
As well as rent and mortgages, guarantors may also be requested for personal loans. Regardless of the reason it is important to seek legal advice if you have been asked to be a guarantor so you can fully understand your obligations before you sign anything.
About the author:
This article was written by a member of the Expert Answers legal advice team and posted by Lloyd Barrett. Expert Answers provides online legal advice on all aspects of UK Law to users in the United Kingdom.