Commercial Lease Guarantee and the Guarantor's Death

In most cases, yes. When the guarantor of a commercial lease dies, the personal guarantee he signed does not die with him. A guarantee is a contract, and a contract survives the person who made it. When your father guaranteed his company's shop lease, he promised the landlord that if the company stopped paying the rent or breached the lease in some other way, he would pay instead. That promise became a liability of his estate on the day he died, and the landlord can enforce it against the estate much as it could have enforced it against him.

What happens next is worth setting out precisely, because the fear is usually worse than the position. The landlord does not have a bill it can present today. It has a guarantee it can call on if and when the tenant company defaults. That is a contingent claim. If the company carries on trading and paying the rent to the end of the term, nothing is ever claimed and nothing is ever paid out of the estate.

The real difficulty is what that uncertainty does to the administration. An executor cannot hand out the money and hope. A guarantee that might be called in two years' time is a known liability, and distributing around it is where executors get hurt personally. That, rather than the rent itself, is usually the problem the family has to solve.

The short answer: the guarantee outlived him

A guarantee is a secondary promise. The tenant company owes the rent; the guarantor promises to step in if the tenant does not perform. Nothing in that structure depends on the guarantor being alive. His personal representatives — the executors named in his will, or the administrators if there was no will — stand in his place for the purposes of the contract, and the liability is met out of the estate's assets.

That last point is worth saying plainly to the family, because it is the fear that keeps people awake. Your father's beneficiaries do not become personally liable for his company's rent. The estate pays, and the estate can only pay what it has. The people who inherit lose value; they do not acquire a debt of their own. The exception is money that has already been handed out, which a creditor may be able to recover from whoever received it.

The only thing that can shorten the guarantee is the wording of the document itself. Some guarantees are capped at a fixed sum. Some run for a stated number of years rather than the whole term. A small number end on the guarantor's death, usually where a solicitor negotiated for that when the lease was signed. Do not assume any of these apply. Read the actual clause, and read the definition of the guaranteed obligations underneath it, which is where the scope is really set.

One drafting detail matters more than most. Commercial lease guarantees are almost always drawn as a guarantee and indemnity. The indemnity limb is a primary obligation rather than a backstop, and it is designed to survive situations in which a pure guarantee might fall away. Where you see that phrasing, treat the estate's exposure as the wider of the two.

What the landlord can claim, and when it can claim it

People assume a guarantee covers the rent. It usually covers everything the tenant owes under the lease, which is a longer list: the annual rent, the service charge, the insurance rent the landlord recharges, VAT where it applies, interest on late payment, the landlord's costs of chasing, and — often the largest single item — dilapidations at the end of the term, where the premises have not been put back into the state the lease requires.

Timing is the other half of it. Most guarantees say the landlord can claim from the guarantor without first suing the tenant company or exhausting any other security. So the estate is not at the back of a queue. If the company misses a quarter's rent, the landlord can write to the executors that month.

There is a related trap on timing in England and Wales. Where a landlord wants to recover a fixed charge — rent, service charge, a liquidated sum — from a former tenant or a guarantor, it must serve a prescribed notice within six months of the sum falling due, under section 17 of the Landlord and Tenant (Covenants) Act 1995. Miss the notice and that particular charge cannot be recovered from the guarantor. It is always worth checking whether the notices behind a large claim were actually served in time.

Two more things to check before accepting any figure. First, whether the landlord holds a rent deposit, and what the lease says about the order in which security is used. Second, whether a business tenancy with security of tenure has continued past its contractual end date under the Landlord and Tenant Act 1954, and whether the guarantee is worded to follow it into that continuation. Guarantees drafted to cover the term "and any period of holding over" generally do. Ones that are not so drafted may not.

If letters have already started arriving addressed to your father, deal with them in writing and keep everything. The pattern is familiar enough that we have written separately about what to do when debt letters keep arriving for a dead parent.

Why the executor cannot simply pay the beneficiaries

An executor's order of business is fixed: identify the assets, pay the liabilities, then distribute what is left. A contingent liability is still a liability. It has an uncertain value rather than no value, and an executor who ignores it and pays the beneficiaries can be made to make good the shortfall out of their own pocket if the guarantee is later called.

The statutory notices most executors know about do not help here. Advertising for claimants under section 27 of the Trustee Act 1925 protects a personal representative against claims they did not know about. A lease guarantee sitting in the deceased's papers is a claim they do know about. Notices are still worth placing for everything else, but they are no answer to this one.

In practice executors take one of four routes, and none of them is painless.

• Retain a reserve. Hold back a sum sized against the realistic exposure and distribute the rest. Straightforward, but it can tie money up for years, and the beneficiaries have to accept it.
• Insure the risk. Specialist estate and contingent liability policies exist for exactly this. An insurer takes the risk on, the executor distributes in full, and the premium comes out of the estate. Availability depends on the lease, the tenant's finances and the term left to run.
• Negotiate a release. Often the cleanest outcome, and the most under-attempted. Landlords will sometimes release a deceased guarantor's estate in exchange for a rent deposit, a replacement guarantor, or a one-off payment.
• Distribute against indemnities. Beneficiaries sign an undertaking to repay if a claim lands. It is the weakest option, because an indemnity is only worth the solvency and goodwill of the person who signed it.

The mechanics of choosing between them are set out in more detail in our guide to why executors cannot distribute around a contingent guarantee. If money has already gone out to the family, read what happens when a creditor writes after the estate has been distributed before you reply to anybody.

The ways the liability actually ends

There are only a handful of events that close this down, and it helps to know which one you are aiming for.

The lease runs out. The contractual term expires, any statutory continuation is brought to an end, the premises are handed back, and the dilapidations claim is settled. Only when that final item is agreed and paid is the guarantee truly spent.

The lease is surrendered. Landlord and tenant agree to end it early, usually for a payment. A surrender ends future liability but not arrears that have already accrued.

The lease is assigned. The company transfers the lease to a new tenant with the landlord's written consent. Whether that releases the guarantor's estate depends on when the lease was granted, which is the next section.

The landlord agrees a release. A deed of release is the only way to be certain the estate is out. A landlord is not obliged to give one, and will want something in return.

Note what is not on that list: the landlord forfeiting the lease and taking the shop back. Forfeiture ends the tenancy going forward, but it does not wipe out arrears that built up beforehand, and those can still be claimed from the guarantor.

Whether the lease was granted before 1996 changes the answer

This is the single most useful date to establish, and it applies in England and Wales.

For leases granted on or after 1 January 1996 — "new" tenancies under the 1995 Act — a lawful assignment releases the outgoing tenant from future liability, and releases its guarantor to the same extent. The catch is that the landlord can require the outgoing tenant to enter an authorised guarantee agreement guaranteeing the incoming tenant, and can require the original guarantor to guarantee that agreement in turn. Where that has happened, the estate's exposure narrows to the immediate assignee rather than disappearing.

For leases granted before that date, the older rule of privity of contract applies. The original tenant, and its guarantor, can remain liable for the whole of the term even after the lease has been assigned to somebody they have never met. Shop leases granted in the early 1990s with twenty-five year terms are still running. If your father's guarantee is of that vintage, the estate can be exposed to defaults by a tenant the company sold to years ago — subject always to the six-month notice requirement described above, which is one of the few real defences in this area.

If the company has gone into liquidation

This is the scenario guarantees are written for, and it is worth understanding rather than dreading.

When a tenant company enters liquidation, the landlord's practical prospect of recovering from it collapses. It turns to the guarantor. Here that means the estate, and the claim moves from theoretical to live.

A liquidator may also disclaim the lease as onerous property. Disclaimer ends the company's liability, but it does not release a guarantor. Worse, many guarantees contain a clause requiring the guarantor to take a new lease of the premises on the same terms if the lease is disclaimed. Read the guarantee for that clause specifically, because it converts a claim for money into an obligation to become the tenant, and it is the one that most surprises families. Where such a clause exists, take advice quickly: the landlord's right to call for a new lease is usually time-limited by the guarantee's own wording.

The opposite case is far more comfortable. If the company is solvent and still trading, the family's best move is often to help it find an assignee or agree a surrender, because that is what actually retires the risk. A landlord being paid on time has little incentive to release a guarantee. A landlord being offered a solvent replacement tenant has a great deal.

What to do in the first few weeks

Work in this order.

• Find the documents. The lease, the guarantee — often a schedule inside the lease rather than a separate deed — any licence to assign, any rent deposit deed, and any side letters. If the lease was granted for more than seven years it should be registered, and you can obtain a copy from HM Land Registry.
• Establish the facts about the tenant. Is the company trading? Is the rent up to date? When does the term end, and is there a break clause anybody can operate?
• Write to the landlord once, carefully. Notify the death, ask for a statement of the account, ask what the landlord says the guarantee covers, and ask whether it would consider a release or a substitute. Do not accept liability for any figure in that first letter.
• Do not pay anything from your own money. Whatever the pressure, an executor who pays a company's rent personally has no easy route to getting it back.
• Instruct a commercial property solicitor. The exposure on a shop lease usually dwarfs the cost of an hour spent reading the guarantee properly.

If you are reading this not as a bereaved family member but as the director who has signed something similar, the useful question is what your own family would inherit. A guarantee you have given is a liability your estate carries, exactly as your father's was. The general position is set out in our guide to whether a personal guarantee survives your death, and the residential version of the same problem turns up when parents act as a rent guarantor for a child.

Directors commonly deal with this by arranging life cover sized against the guaranteed obligation, often written under trust so that the money is paid outside the estate and can be used quickly. It does not remove the guarantee, but it means the executors have cash available to meet a claim or fund a release, rather than freezing the estate for years. Any application is medically underwritten, so what is available depends on age, health and occupation, and nothing is settled until an insurer has offered terms. If that is your position, you can get life insurance quotes and have an FCA-authorised broker price cover against the actual liability.

Scotland and Northern Ireland

The basic principle holds across the UK: a guarantee is a contract, and contracts bind the estate. The surrounding machinery differs, and the differences are not cosmetic.

In Scotland a guarantee is a cautionary obligation and the guarantor is a cautioner. The estate is an executry, administered by an executor who obtains confirmation rather than a grant of probate. The Landlord and Tenant (Covenants) Act 1995 does not apply in Scotland at all, so the release-on-assignation rules described above are simply not part of Scots law; whether an assignation frees the cautioner turns on the lease itself and on general principles of cautionry. Commercial leases end on the agreed ish date unless continued by tacit relocation, and a shop tenant facing termination has a limited right to apply to the sheriff for a renewal under the Tenancy of Shops (Scotland) Act 1949.

In Northern Ireland, business tenancies have their own renewal regime under the Business Tenancies (Northern Ireland) Order 1996, and estates are administered under Northern Ireland's own rules through the High Court in Belfast. nidirect sets out the local process for dealing with a deceased person's affairs. As in Scotland, the 1995 Act does not apply, so nothing should be assumed about an assignment having released the guarantee.

Free help exists for the family side of this, even though the lease itself needs a solicitor. MoneyHelper and Citizens Advice both cover debts after a death, and neither will sell you anything. The rest of this subject is collected in our guide to debt, credit and finance after a death.

Frequently asked questions

Can a landlord claim from a dead guarantor's estate?

Usually yes. A guarantee of a commercial lease normally binds the guarantor's estate for the rest of the term, so a landlord can claim unpaid rent and other breaches as they arise. The claim stays contingent until the tenant actually defaults, but it is a real liability and the executors have to provide for it.

How long must the estate stay open because of a lease guarantee?

Potentially until the lease ends, is assigned with the landlord's consent, or is surrendered. Executors often keep a reserve, or take out insurance against the risk, so that the beneficiaries can still be paid. Negotiating a release with the landlord is usually the fastest way out, and it is worth asking early rather than late.

Does the tenant company going into liquidation end the guarantee?

No, that is exactly when guarantees are used. A landlord who cannot recover from an insolvent tenant company turns to the guarantor, and here that means the estate. Liquidation of the tenant makes a claim on the guarantee more likely rather than less likely, and a liquidator disclaiming the lease does not release the guarantor either.