Guarantors in Mortgages and Letting Agreements

Who is a Guarantor

A guarantor is a person who agrees to take responsibility for an existing or a future liability of another person (the principal) to a third party. A guarantor is therefore seen as a surety in assuming a secondary liability for the person who remains principally liable.

A Guarantee Agreement

A guarantee agreement is an agreement usually in writing whereby the guarantor promises to be responsible with the principal under a contract for his or her obligation to a third party. The guarantor will therefore be personally liable if the principal does not perform his or her obligation under the contract.

Discharge

If a contract between a principal and a third party is materially varied then the guarantor will in principle be discharged from his or her obligations. However, this does not apply to a person undertaking a primary liability.

Owing to the fact that liability of the guarantor is usually co-extensive with that of the principal debtor if the debtor is discharged, the guarantor will also be discharged.

Performance Guarantee

A performance guarantee is a contractual undertaking that is usually granted by banks to pay or repay a sum of money as a result of any default in performance by the principal debtor of another contract with a third party.

It is possible for the liability of a bank to arise from a mere demand by the third party even if evidentially the principal debtor is not in default in relation to his or her obligations.

Guarantor in Letting Agreements

A guarantor in relation to a tenancy agreement is usually required in the following:

  • Tenants in receipt of state benefits (usually housing benefits)

  • Students or shared tenancy

  • Tenants with poor credit rating or inability to obtain satisfactory references

  • Landlords’ doubts about Tenants’ ability to pay monthly instalment of rent

A guarantor is usually expected to satisfy the following requirements:

  1. UK resident

  2. Home owner (ideally)

  3. Good credit rating

  4. Ability to pay the rent due under the tenancy

In relation to a tenancy agreement a guarantor agrees to indemnify the landlord of all losses that he or she suffers as a result of any breach of the tenant’s obligation under the contract.

Guarantor in Mortgages 

A guarantor is usually required in mortgage applications in circumstances where the applicant is unable to secure the mortgage independently (conventional mortgage).

The reasons for an applicant’s inability to obtain a mortgage independently are inclusive of:

  • Poor credit rating or no credit rating

  • Inadequate job history

  • Insufficient funds to pay the down payment

A guarantor in a mortgage is popular amongst first time buyers or students who find it difficult to secure the funding and proof of satisfactory income owing to the increasing house prices. In these circumstances the guarantor has to prove sufficient income which includes the disclosure of assets and liabilities.

Rights and liabilities of a Guarantor

A guarantor usually has little rights in a mortgage or other agreement unless stipulated in the agreement. He or she has no right or interest in the property, or subject matter of the contract but can be held accountable for any default in payments to the mortgagee.

A guarantor should therefore take precautionary steps in ascertaining the extent of his or her liability and also the circumstances of the principal he or she is indemnifying before agreeing to be a guarantor.

It may also be necessary to seek independent legal advice owing to the fact that the third party to the contract may enforce his or her rights against the guarantor if there is a default by the principal. If legal proceedings are brought against a guarantor, he or she may find that they are liable not only for the repayments but also for the third party’s legal costs if the latter is successful.