Guarantors in Mortgages and Letting Agreements

Who is a guarantor?

A guarantor is someone who agrees to take responsibility for an existing or a future liability of another person (the principal) to a third party (eg, agree to pay the principal’s rent if they default).

A guarantee agreement

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

Discharge

  • If the debtor is discharged, the guarantor will also be discharged.
  • If a contract between a principal and a third party is materially varied, the guarantor will also usually be discharged from his/her obligations. This does not apply to a person undertaking a primary liability, however, and, if it is clear that the variation is insubstantial or beneficial to the guarantor, it will not amount to a material variation.
  • A guarantor may be discharged if the lender and the borrower enter into a binding agreement to extend the time for performance by the borrower of its obligations under the principal contract.

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.

The guarantee provides that the performance of the obligations in an underlying contract is guaranteed so that, if a principal fails to perform or pay money, the guarantor will be responsible for the performance of the obligation or the repayment of the money.

Guarantor in letting agreements

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

  • tenants in receipt of state benefits (usually housing benefits);
  • students or shared tenancy;
  • tenants with poor credit rating or inability to obtain satisfactory references;
  • tenants which, in the opinion of a landlord, may not be able to pay monthly installments of rent.

A guarantor is usually expected to satisfy the following requirements:

  1. UK resident
  2. be aged between 18 and 75;
  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 s/he 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 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 among first time buyers or students who find it difficult to secure the funding and proof of satisfactory income owing to 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. S/he 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/her liability and also the circumstances of the principal s/he is indemnifying before agreeing to be a guarantor.

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