Satisfaction not Guaranteed

Given current economic circumstances, many more landlords than previously will accept tenants who are or may in future be in receipt of benefits. With the ending of furlough and possible widespread redundancies, many tenants may find themselves in financial difficulties.

The current restrictions on taking action against defaulting tenants make eviction difficult. Even if the restrictions were relaxed tomorrow it is likely to take 12 to 18 months to get to court because of a backlog of cases. Courts are prioritising anti-social behaviour and domestic violence cases. Landlords pursuing rent arrears are put to the back of the queue.

What can landlords do? Rent deposits are limited to five weeks’ rent (six weeks’ for rents of £50,000 or more) which barely covers one month’s arrears. A guarantee from an employed homeowner is an obvious answer.

However, landlords and letting agents need to be careful. The courts construe guarantees strictly against the beneficiary. The guarantee should be executed as a deed and entered into before or simultaneously with the tenancy. Any subsequent variation to the terms of the tenancy must be agreed with the guarantor.

Even if a guarantee is properly entered into there are still problems for landlords. The NRLA forms of limited and unlimited guarantee both allow for the guarantor to cancel the Guarantee once the fixed term of the tenancy ends. The guarantor can give not less than three months’ notice to cancel. The landlord can then within 6 weeks of receiving the notice give notice to the tenant under Section 21 Housing Act 1988 to extend the cancellation period. The landlord must inform the Guarantor he has served the notice and start proceedings for possession within one month of the s21 notice expiring. If the landlord does that the cancellation will not operate for a further period of three months.

Before the moratorium on evictions, this might have enabled a landlord to get vacant possession, but it is woefully inadequate today. Perhaps the NRLA consider it unfair for a guarantor to be liable indefinitely, but the solution encouraging the landlord to evict the tenant is in my opinion not a great idea.

As an aside, serving a s21 notice in such a case looks like a no-fault eviction. The tenant may have paid the rent and complied with the covenants in the tenancy, but the landlord will seek to evict him because the guarantor wants to exercise a right that the landlord has volunteered in the guarantee. Moreover, given the likelihood of s21 being abolished this cancellation right will become unfettered and the guarantor will be released. Why would any guarantor not seek to cancel? If anyone senior from the NRLA is reading this, I would welcome their response. Disclosure: I raised this point with the NRLA in August 2020 but have not heard back.

However, even if a guarantee does endure indefinitely, landlords may wish to amend their standard guarantees where the tenant is or may be in receipt of benefits. Why so?

Well, consider the case where the benefits are paid directly to the landlord. If the benefits are later clawed back because the tenant has been overpaid the landlord may find the guarantee does not work. Standard guarantees expire when the tenancy ends. The clawback may occur only after the tenancy has expired. Even if the tenancy is still running, the wording of the guarantee may not be wide enough to catch the renewed obligation on the part of the tenant to pay the sum that has been clawed back. The guarantor can argue that the tenant had discharged the obligation to pay rent and the guarantee does not catch an obligation to reimburse. I am not aware of that point being tested in court, but it would be an obvious defence for a guarantor to run.

Guarantees should explicitly refer to repaying a sum equal to the amounts clawed back and should also be stated to endure after the end of the tenancy.

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