I’m granting a commercial lease to a start-up company. The agent has recommended I get some security and has suggested either a deposit or guarantee. Which do you think is the best one to choose?
Unfortunately, this question isn’t as simple to answer like that. If it’s a start-up company I will assume that it has no or very little money in the bank or assets which is why some form of security has been suggested.
If you were to go down the guarantor route, you would really want to make sure that (a) ideally it is an individual but if not a company with a decent history; and (b) whether it is a company or an individual that they have the means and assets to cover any liabilities potentially owed under the lease. It is all very well getting someone to guarantee the performance of a lease, but if they have no assets or, cash available then there is little point in enforcing a guarantee that they have given. You also need to consider what industry the guarantor is in and the level of their wealth because what you have today may be gone tomorrow, and like all things in life, you can be certain the day you try and enforce a guarantee against a stockbroker is the day the market crashes!
The other alternative you suggest is the deposit. A lot of landlords prefer this on the basis that it is usually enough to cover a couple of months’ rent and if the tenant is late with their rent by 14/21 days (usually if the lease is well drafted) then the landlord can forfeit the lease knowing that the deposit covers the guarantee and hopefully the cost of plugging a few holes in the wall.
Sorry but there really is no definitive answer and it does depend on each situation but a few questions you should be asking yourself in addition to the above are:-
- Is the tenant carrying out major works to the property? More works – more cost to remove;
- Do some research on the company itself. Any assets? HOws its cashflow?
- What about the directors? How are their finances and financial history;
- If you wanted to go belt and braces you could ask to see their business plan (if they have one) to see projected income;
- Check a guarantors financial position. If they have assets perhaps check if they are mortgaged or subject to HP;
- Is it possible for funds to be placed in an escrow account for the rent for the first 3 months? Withdrawals each month?
- Should I grant a shorter lease so that I can gain possession easier? Less exposure than a longer lease.