The Landlord’s key concern in letting its property will be the ability of the tenant to pay the rent and comply with its obligations under the lease.
Dentists who take leases of dental premises will usually be asked by their landlord to demonstrate their ability to meet the commitments under the lease. Landlords will often ask to see references from a bank or accountant or a trading reference together with usually three years’ trading or company accounts to assess the position.
Leases are often taken in the name of a dentist’s company. This has the advantage of ensuring liability under the lease will stay with the company and not the dentist personally which could risk his personal assets if he breaches the lease.
If the tenant company is new with no trading history or assets, the landlord will often ask the dentist for added security. This can be a guarantee from a larger more established parent company or, where the dental corporate is a small organisation, from one or more directors of that company.
Guarantees will bind the guarantor so that they are liable to underwrite the tenant’s liability usually until such time as the tenant sells on the lease. They can also require the guarantor to take a new lease if the landlord forfeits the lease if the tenant is in breach, or if the tenant becomes insolvent and a trustee in bankruptcy or liquidator disclaims that lease.
The liability can therefore be significant and if personal guarantees are given the assets of the individual guarantors will be vulnerable if any claim is made under the guarantee.
Alternative security may be acceptable to the landlord. Rent deposits for a fixed sum of money (usually equivalent to six to 12 months rent) are common. The sum is deposited with the landlord and held in a separate account as security for the tenant’s obligations under the lease. The disadvantage to the dentist is that this ties up a large sum of money for a long period of time (usually until the lease is sold or until it ends) which can have cashflow implications.
Bank guarantees are another form of security which can be offered. A sum of money is deposited with a bank in exchange for the bank issuing the guarantee up to that sum of money. Bank guarantees are usually expensive to operate and are not liked by tenants. Consequently a guarantee may be a preferred alternative.
Under most modern leases, if the tenant sells the lease, the tenant and any guarantor will usually be released on that sale. However, if, (as is usual) the landlord has to give its consent to allow the sale he can insist that the outgoing tenant enters into an Authorised Guarantee Agreement (AGA). This is where the dentist guarantees his buyer’s liabilities under the lease, until the buyer later sells the lease with landlord’s consent.
If the dentist has to give an AGA, the landlord may ask that his guarantors also guarantee the AGA to guarantee the buyer. As the law currently stands, this is not allowed and should be resisted.
Some older leases (usually dated before 1996) make the tenant dentist and its guarantor liable for the whole of the lease term regardless of whether or not that lease is later sold. A well advised dentist who buys an older lease should try and limit any guarantor’s liability to the particular tenant it is guaranteeing and not any tenant under the lease.
A dentist may decide to sell the shares in the company which holds the lease when he sells his business rather then the lease itself. If there is such a sale the guarantee will not usually be released until the lease is later sold (if the lease is a new lease), and landlord’s consent is granted allowing the transfer of the lease. If the lease is an older lease there will be no such release.
On any dental sale (whether a share sale or the sale of the dental lease) the dentist should ask the buyer to indemnify the dentist and/or the guarantor against any liability under that lease and/or the guarantee and to try and obtain the release of the guarantor within a given period after the sale. Where appropriate, such indemnity and agreement should be backed up by additional security, for example by funds held in a separate account.
Guarantees can often cause problems for dentist both on buying and selling dental leases. Legal advice should be sought before a guarantee is given or a lease where a guarantee exists is sold to protect the guarantor’s position.