With house prices and lettings continuing to increase without any sign of slowing down, the need for individuals to use guarantors has risen as a result. Since having tenants with guarantors has many legal requirements, landlords need to understand how guarantors work so that they don’t come into any trouble later on down the road.
If you’re a landlord looking for some security when taking on a tenant, this guide will cover the ins and outs of requiring tenants to provide a guarantor.
What is a guarantor?
In the renting world, a guarantor is someone that agrees to pay the rent for your tenants should they be unable to. The guarantor legally agrees to be on the hook for the agreed costs, so as a landlord you can ask them to pay up if your tenants don’t.
Before agreeing to new tenants, you should always carry out tenant reference checks to try and minimise your financial risks as a landlord. Tenant background checks will help shed light on your tenant’s renting history, financial records and inform you of any criminal convictions they might have. Ideally, these checks will show that your prospective tenants are a great match, but sometimes it can raise a few red flags such as a history of rent arrears.
Just because you have some concerns, this doesn’t mean you have to turn the tenants away – but you may want to look for some extra security because tenants defaulting on rent can cost you a lot more than just lost rental profits.
Asking for a guarantor can be a very effective way to mitigate risk while still taking on the tenants as it gives additional reassurance that you can collect rent from someone, even if it’s not the current residents of your property.
Landlords will often ask a tenant for a guarantor for the following reasons:
- The tenant has no credit or borrowing history
- They have less than 6 months of income history
- They are a student or have low earnings
- There is a history of debt or County Court Judgements (CCJs)
- Lack of previous housing stability including having no fixed address or having lived at their current address for less than six months
Who can be a guarantor?
Largely, who can be a guarantor is up to the landlord’s discretion, however most guarantors will be over 21, have a good credit history and be able to prove that they are financially stable. Significant assets, such as being a homeowner, can also help make someone appear as a reliable choice for a guarantor. There is no point having a guarantor if they are no more credit worthy than the tenant.
You’ll also want your tenant’s guarantor to be someone that lives in the UK as it’s easier for you to pursue payment from them should that become necessary. Hopefully it never does, but it can be very challenging to take legal action to recoup rental fees if the guarantor lives in another country.
As you would do with any tenant, you’ll want to carry out checks on your tenant’s proposed guarantor and ensure that they seem like a safe option from your perspective. You should have a guarantor application form so that you can vet them as thoroughly as you would a tenant.
This application might ask for the following from the guarantor:
- Their personal details
- Their employment and income history
- References from employers, accountants, etc
- History of any legal issues or CCJs
- Permission to conduct a credit search
- Their signature verifying all the information provided is true to
How much does a guarantor need to earn?
There is no hard and fast rule about how much a guarantor needs to earn in order to be a safe bet for your business, however having a clear understanding of their annual income and their existing assets can help you to make an educated decision.
You can decide if this is right for you, but the general rule of thumb is that the guarantor should have a gross annual income three times the rent of the rental property they are acting as a guarantor for.
What is a guarantor agreement?
Prior to signing your tenancy agreement, you should arrange for a guarantor agreement to be made and signed by all parties – the tenant, the guarantor and the landlord. This is a legally binding document which all parties should thoroughly understand and enter into willingly.
It should be very clear in this document when a guarantor can be asked to pay money, how long the guarantor agreement last, what happens if the tenancy is a joint one (ie is the guarantor responsible for both tenants’ commitments or only one), and if the guarantor is responsible only for rent or if the agreement also covers damage to the property.
Any changes to the tenancy can affect whether or not the guarantor agreement still applies, so if you’re looking to increase the rent or change any other aspects of the tenancy agreement, you should revisit your guarantor agreement as well. If you do not have the guarantor agree to tenancy changes, then it is possible that your guarantor agreement would no longer be valid – ultimately a court would decide if this became disputed.
A guide to writing a guarantor agreement
Often the paperwork for becoming a guarantor will include a guarantor’s application form and a guarantor’s agreement. The application form will allow you to check their details and credit history. If you deem them to be a trustworthy guarantor choice, then you will proceed to the guarantor agreement.
With legal documents, it is always good practice to have a professional prepare or look over them however, here are a few things you might find in a guarantor agreement:
The date on which the agreement is being signed
The term that the agreement is valid for with a defined start date and information on when or how it ends
The name of the tenant/s and any relevant property details
Signatures and names for all parties to the agreement
How any changes to tenancy will be handled in regard to the guarantor’s responsibilities
Does a guarantor need to sign the tenancy agreement?
The guarantor needs to receive the guarantor agreement in writing and must sign it. When they are given the guarantor agreement, they should also be given a copy of the proposed tenancy agreement. The guarantor should sign their agreement prior to the tenancy agreement being signed or the guarantee can be part of the tenancy agreement, and everyone signs on at the same time.
If a tenancy agreement is settled prior to the guarantor signing the guarantor agreement, then there may be extra rules or steps in how the guarantor is secured. If the tenancy pre-dates the guarantor agreement, then a guarantor agreement must be signed as a deed – this means getting the signature witnessed.
In order to be valid, a guarantor agreement which is being signed as a deed will usually need the following:
A clear statement that the document is intended to be a deed
The guarantor’s signature
Signatures of people who witnessed the signing
These extra steps happen because of a complicated legal reason: when signing the guarantor agreement, the benefit that the guarantor should receive is the tenant being granted tenancy. If your tenancy agreement is already signed, then there is no benefit for the guarantor to gain, which could make your guarantor agreement invalid.
In the legal world, an agreement means that there is an exchange, and each side has a benefit whereas a deed is when the signer receives nothing in return. Therefore, signing as a deed gets around this issue of the guarantor not securing the tenant’s tenancy as a benefit.
What are the legal requirements for dealing with guarantors?
There is a legal requirement that a guarantee agreement is in writing, that the guarantor sees the tenancy agreement prior to signing and that the agreement is signed. As good practice, you should make sure that the guarantor and the tenant understand and are happy with the terms and conditions laid out in the agreement.
If the guarantor agreement was presented as a separate document to the tenancy agreement, you should attach a copy of the tenancy agreement, and get the guarantor to sign and date it at the same time as he signs the guarantee. This just helps prove that they have seen the tenancy agreement prior to signing on as a guarantor.
As soon as all of these documents are signed, the guarantor can be held to the guarantor agreement and is officially liable.
Note that by law, landlords are not allowed to charge additional fees to a prospective tenant for the tenant and guarantor reference processes. So, if there are costs associated with carrying out a credit check or getting a guarantor agreement written up, then those costs lie solely with you. They can, however, be written off as a business cost against tax.
What happens if a guarantor cannot pay?
If the guarantor cannot pay, then the landlord can begin court proceedings against both the guarantor and the tenant. Usually this means pursuing a county court judgement (CCJ) against both.
This will be a legal document that lays out how much they owe and when they are expected to pay it back by. Have a CCJ issued will negatively impact their credit scores and make it harder for each to borrow money again in the future.
A court may decide to not allow the CCJ if it’s been deemed that the terms of your guarantor agreement were unfair. This is why involving a professional in drawing up your legal paperwork is recommended, as they should be able to guide you and ensure that your agreement is enforceable.
What happens if a guarantor dies?
How the death of a guarantor is handled can depend on what was put in the agreement. It is possible that the guarantor’s estate or assets might still be liable for the agreement. It is worth consulting a lawyer to see what your rights are in regard to this.
More practical, perhaps, is to ask your tenants to find a new guarantor. Remember, since the tenancy agreement would already be in place, a new guarantor coming in would sign their guarantor agreement as a deed.
If a guarantor passes away after you have had these tenants for a significant timeframe and the tenants have consistently paid their rent on time, you might also consider not requiring a guarantor for them any longer.
How long is a guarantor liable?
How long a guarantor agreement lasts for depends on the wording of the agreement – there’s no general rule about how long they last. Often a guarantor is liable for as long as the tenancy they signed onto is valid, but you should be clear about how long you expect the guarantor agreement to last prior to everyone signing on.
If the terms of the tenancy change or the initial fixed term of the tenancy ends, then this may invalidate the guarantor agreement. If there’s a major change such as a raise in the rent or a renewal of the tenancy, you should get the guarantor’s consent to the change in writing before the change takes place. This may not be necessary if the change is small doesn’t affect the main terms of tenancy (ir correcting the spelling of names within the contract).
As always, keeping communication open with your tenants and the guarantor can help avoid any issues. If it is unclear how long a guarantor is liable for, it can end up in court so consulting a legal professional when drawing up these agreements can help avoid costly court issues later.
What to do if there is no guarantor?
If you have asked tenants for a guarantor and they’re unable to provide one, there may be good reason for this. For example, if they’ve recently moved to the UK, they may not know someone who is based locally and is willing to be financially liable for them. This doesn’t mean that they’re a bad tenant or a big risk, just that they don’t have an established circle in the UK to draw from.
It can be hard to decide if you want to take the risk on tenants with no guarantors, but if you’re considering it here’s a few things you can ask for instead:
Ask for tenant references from previous landlords
Get the contact details for these landlords and contact them yourself. Ideally, try and get more than once reference or ensure that the tenancies lasted for at least a year so that there’s significant rental history to draw from.
Take a higher deposit
The rules around deposits can vary depending on how much the annual rent amount for the property is worth and where you live, so check what the maximum is that you can legally charge. If you’re worried about a tenant, consider taking a higher deposit.
Ask for rent in advance
Again, the rules around this vary by area, for example Scotland caps it at 6 months rent in advance while England does not have a limit. Asking for rent in advance can help you feel confident that the tenant has enough savings to draw on to cover rent even if their income is a bit lower.
While there’s always some risk involved in taking on a tenant, hopefully these actions can help you reduce the chances of having to chase a tenant for money.
How do guarantors work in joint tenancy?
If there is a joint tenancy, you should clarify up front if the guarantor is liable for both tenants or just the tenant they are affiliated with. If this is not specified, then often the guarantor is liable for both tenants’ rent, and they should be aware of that when entering into the agreement.
It is allowable to have more than one guarantor, so if joint tenants would prefer to each have their own guarantor, this can be arranged. If there are multiple guarantors, each one should sign the guarantor agreement and if any changes are made to the tenancy then each one should agree to it.
Working with multiple tenants and guarantors can be confusing, so getting a solicitor to help with this process is always a good idea.
Reducing risk
Ultimately, getting a guarantor is about reducing the risk of financial loss for you as a landlord. It is one of many ways to protect yourself when renting out a property. Another way to protect your property is by taking out landlord insurance – whether it’s a building insurance policy, contents cover or property owner’s liability cover, having insurance can be a small investment that protects you against a big financial risk.
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