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Is entering in to a rent guarantee a good idea?

Answer – These seem to be cropping up a lot at the moment so I am not surprised to see this question being asked.  For those that don’t know, it’s probably easiest to illustrate the way these work in a diagram:

Freeholder lets a property to a Company (‘Company A’) by way of a Common Law Tenancy for say £1200

Company A then lets the property to another Company (‘Company B’) by way of another Common Law Tenancy (although sometimes called a Rent Guarantee Agreement’ for saying £1400

Company B then lets the property for say £1800.

As you can see, each party makes money from this but the idea is that Company B is more likely to pay the rent than any tenant that is housed in the property.  So what are my concerns with this arrangement?  Having made countless orders for possession, my big concern, is how do you go about unravelling all of this if you as the freeholder require vacant possession of the property? Potentially with a lot of difficulties is the answer!

Let’s say for example that the property is ultimately let on an Assured Shorthold Tenancy (‘AST’) as the majority of properties are now in England. Company A is your tenant and fails to pay you the rent due because Company B fails to pay the rent due to them. You, in accordance with your Common Law Tenancy, serve a notice to quit on Company A ending their tenancy and Company A serve the same on Company B so that tenancy ends.  So what happens to the occupants? Nothing unless Company B can get them out presumably, if they have been good tenants, by section 21 notice. But I can tell you from experience, that there is very little chance that the termination provisions on the tenancies will all match up so that the occupier property will be gone by the time both Company A and Company B have disappeared!

So there you are, left with a tenant that you would like to get leave. So what’s your next step?  Well, if they have been good tenants your only option is a section 21 notice which is relatively straightforward.  However, you need to provide evidence that their deposit is registered, they were given the prescribed information on time, they were given the EPC, a valid gas certificate and how to rent before they took up occupation (together with all of the other information that should have been provided during their occupation).  Well, you didn’t serve it as you weren’t granting the tenancy, Company B should have served it!  So you then have the task of trying to get all of this information from Company B before being able to serve a valid section 21 notice. Hopefully, they have dealt with this correctly but if they haven’t you are in a difficult position.  One I would be able to help you with…but it would be both time consuming and expensive!

As landlord’s, you hear horror stories all the time about bad tenants, and these are people that the landlords have vetted!  Imagine, having to deal with, and rely on, your tenant’s tenant to do everything correctly in order that you can, if all goes wrong, get your tenant’s tenant’s tenant out…I wouldn’t be brave enough to take this risk!

Content Writer​

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Last updated | 19 July 2023

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