The personal guarantee on the lease nobody mentioned

We were careful about the bank. When the loan came with a personal guarantee we read it twice, asked what happened if the business failed, negotiated the amount down, and understood exactly what we were signing. It felt like the serious document in the pile.

Two months earlier we had signed a ten-year lease on a unit. Somewhere around page forty, after the repairing obligations and the service charge schedule and a long section about signage, there was a guarantee. Both directors signed it. Nobody talked about it, because by then everyone in the room wanted the keys.

That guarantee outlasted the shop, the company that traded from it, and one of the directors' involvement in the business entirely.

What a lease guarantee actually covers

A loan guarantee has a number attached to it. You borrowed £50,000, so the worst case is broadly £50,000 plus costs, and it shrinks as you repay. This makes it feel manageable even when it is not.

A lease guarantee has no such comfort. It typically makes you personally responsible for everything the tenant company owes under the lease, for the whole term. That is rent, service charge, insurance rent, interest on late payments, the landlord's legal costs, and dilapidations at the end. It does not amortise. On a ten-year lease it is the same size in year eight as it was on day one, minus the rent already paid.

Illustrative numbers make the scale obvious. A unit at £32,000 a year rent plus around £6,000 of service charge and insurance is £38,000 a year. Six years left on the term is a headline exposure of £228,000, before any dilapidations claim for putting the unit back to the state the schedule of condition describes. That is not a theoretical figure. It is what a landlord's solicitor writes in the first letter.

A loan guarantee shrinks every month you pay it. A lease guarantee is exactly as large in year eight as it was on the day you signed.

Leaving does not end it

The mistake we made was assuming the guarantee was tied to our involvement in the business. It is not. The guarantee is a contract between you personally and the landlord. The company is not a party to your side of it.

So resigning as a director does not end it. Selling your shares does not end it, and the buyer's promise to indemnify you is only worth whatever the buyer is worth later. Even the company being dissolved does not end it, because the whole point of the guarantee is that it survives the tenant's failure. That is what the landlord bought.

The related point on directors' exposure generally is worth reading: what a company director is personally liable for sets out the rest of the picture.

Assigning the lease moves you back, not out

The obvious escape is to assign the lease to somebody else. For leases granted from 1 January 1996, the Landlord and Tenant (Covenants) Act 1995 does release the outgoing tenant on a lawful assignment, which sounds like the end of the story.

It usually is not. Section 16 of that Act lets a landlord require an authorised guarantee agreement, an AGA, under which the outgoing tenant guarantees the incoming tenant's performance. And where the outgoing tenant had a personal guarantor, the landlord will normally require that guarantor to guarantee the outgoing tenant's obligations under the AGA. The profession calls this a GAGA, which is an unfortunately apt acronym for how it feels to discover it.

The net effect is that assigning moves you one step further from the front line rather than removing you from it. AGA liability generally runs while your immediate assignee remains the tenant; if they lawfully assign it on again, you are usually released from future obligations. So your exit depends on somebody you no longer control choosing to move on, and on doing it properly.

Leases granted before 1996 are worse again, because privity of contract means the original tenant can remain liable for the whole term regardless of assignment.

What we should have negotiated

All of this is negotiable at the point where the landlord wants a tenant and you have not yet signed. Almost none of it is negotiable afterwards. The things worth asking for, roughly in order of how often landlords agree:

A rent deposit instead of a guarantee. You put six or twelve months' rent into a deposit deed, the landlord can draw on it for arrears, it is topped up if used, and it comes back at the end. It ties up cash, which hurts, but it converts an unlimited personal exposure into a known and finite one. For a small business this is very often the better trade.

A cap. If the landlord wants a guarantee, ask for it to be capped at a stated sum, commonly six or twelve months' rent, inclusive of costs. A cap changes the character of the document entirely.

A time limit or a fall-away. A guarantee that ends after three years of payment on time, or once the tenant company has filed two years of accounts showing a stated level of net assets, is a reasonable ask and gives the landlord what they actually want, which is protection during the risky early period.

A release on assignment to a tenant of equivalent covenant strength, so the AGA and GAGA problem is dealt with in advance rather than at the point you are desperate to get out.

And an exclusion for variations. Check whether the guarantee extends to any future variation of the lease, and whether it will automatically attach to a renewal lease under the Landlord and Tenant Act 1954. A guarantee you gave on a ten-year term should not silently reattach to the next one.

What we do now

Every lease we sign now gets the guarantee read first, before the rent. It is a two-minute check and it tells you more about your real risk than the headline figures do.

If you already have one, the useful exercise is to work out the number. Take the annual rent plus service charge and insurance, multiply by the years remaining, and write it somewhere you will see it. Then look at three specific things in the document: whether it is capped, whether there is any release mechanism, and whether it survives assignment. If you are approaching a rent review or a lease renewal, that is a moment where the guarantee is genuinely back on the table, and it is worth spending money on advice to use it. The rent review that nearly closed the shop and the five-year lease we outgrew in eighteen months both start from the same failure to read a document while it could still be changed.

We were lucky, in the end. The unit was assigned to a decent covenant, the landlord released us on completion because we asked and because the incoming tenant was stronger than we had been, and the whole thing cost us legal fees and a bad year of sleep. The version of this story where the assignee fails eighteen months later is the same story with a very different ending, and nothing we did would have changed it. That is the part worth taking seriously: once it is signed, the outcome stops being yours to influence.

If your exposure is on the borrowing side rather than the property side, personal guarantees on business loans covers how those work and what can be negotiated.

Common questions

Does my personal guarantee end when I resign as a director?

No. A personal guarantee is a contract between you and the landlord or lender personally, not between them and the company, so your role in the business is irrelevant to it. Resigning as a director, selling your shares, or the company being wound up all leave the guarantee intact, because covering exactly those events is what the landlord obtained it for. The only reliable ways out are a written release from the landlord, a contractual fall-away or expiry inside the guarantee itself, or the guarantee being replaced as part of an assignment. An indemnity from a buyer of the business is not a release; it is only as good as the buyer.

Can I get out of a lease guarantee by assigning the lease?

Partly, and rarely completely. For leases granted from 1 January 1996, the Landlord and Tenant (Covenants) Act 1995 releases the outgoing tenant on a lawful assignment, but section 16 allows the landlord to require an authorised guarantee agreement under which the outgoing tenant guarantees the new tenant. Your personal guarantee is then usually extended to cover those AGA obligations. In practice you move one step back rather than out, and full release generally comes only when your immediate assignee lawfully assigns the lease on to somebody else. Negotiating a release on assignment before you sign is far easier than obtaining one later.

Is a rent deposit better than a personal guarantee?

For most small businesses, yes, if you can afford the cash. A rent deposit deed puts a defined sum, often six or twelve months' rent, into an account the landlord can draw on for arrears, with an obligation on you to top it up if it is used and a return of the balance at the end of the term. It converts an open-ended personal exposure that could run to six figures into a known, finite amount. The cost is working capital tied up for the length of the lease, which is real, but it is a cost you can size in advance rather than a risk you cannot.

Can a personal guarantee on a lease be negotiated after signing?

Not usually on its own, because the landlord has no reason to give up protection they already hold. The realistic openings are moments when the landlord wants something from you: a lease renewal, a rent review, a request to assign or sublet, a consent for alterations, or a proposed variation of the term. At those points a cap, a time limit or a release on assignment becomes a negotiable item rather than a favour. If none of those is coming up, the other route is offering a substitute the landlord values more, such as a rent deposit or a stronger guarantor, in exchange for the release.