A renter might seem like a good candidate to move into your property. There's just one issue: they don't earn enough or cannot prove they have a stable income to pass referencing. These people usually come in the form of a student, someone who makes high commission but has a low base salary or a renter with a low credit score. It's not all bad news, however, and this person can still move into your property with a deed of guarantee, which gives you peace of mind that you will receive the rent. But just what is a deed of guarantee, and how does it work?
What is a deed of guarantee?
A deed of guarantee is a legally binding contract between the landlord and the renter naming a guarantor on the tenancy. The guarantor acts as a safety net, stepping in to pay the rent if the tenant can no longer continue making the payments.
With a deed of guarantee in place, the landlord can feel more confident about letting the property to someone who seems like a good fit on paper but doesn't necessarily pass affordability checks or referencing.
For the deed of guarantee to become a binding contract, the guarantor must sign it in the presence of a witness. Landlords will also need to keep an eye on the deed of guarantee – any change to the tenancy or new tenancy automatically ends the deed, with the landlord needing to seek new security.
When do I need a deed of guarantee?
You may decide a guarantor is needed if you have a suitable applicant for the property who doesn't meet traditional affordability checks. They may be a student, self-employed person without sufficient accounts filed to prove their income, or someone on a low base salary earning high commission.
The latter two can likely afford the rent in real life but don't meet the conventional affordability criteria used during tenant reference. Therefore, getting someone to guarantee the monthly rent on their behalf provides financial security for you and allows the renter to move into the property.
A guarantor may also be required for someone moving overseas who can afford to pay the rent but doesn't pass the credit check as they haven't had the chance to build up their credit score. If the renter pays the rent without any issues, as is most often the case, there will be no need to contact the guarantor.
What is a guarantor?
A guarantor guarantees the rent if the tenant can no longer make the payments. They are essentially responsible for the tenant's debts to the landlord. If the guarantor fails to pay the rent, they will likewise be legally liable when the landlord seeks to recover funds.
Who can be a guarantor?
Guarantors are usually a relative or close friend of the tenant, though that's not always the case. To qualify, they need to meet eligibility criteria to ensure the rental payments on behalf of the tenant moving into the property. Many landlords and agents stipulate that guarantors must be:
- Over 18
- A UK resident (many landlords feel uncomfortable accepting an overseas guarantor as it can be very difficult to bring claims against residents of a different legal jurisdiction)
- A homeowner
- A good credit history
- Able to demonstrate that they can afford to cover the rent
The guarantor might get rejected for the following reasons:
- They are retired
- They don’t meet the affordability checks
- They live abroad
- They don’t own their property.
The guarantor will also usually need to provide the following documents:
- 3 months bank statements
- 3 months payslips or latest tax return
- Proof of homeownership
- Proof of address
Guarantors will also need to undertake a credit check and ensure they pass regular tenant referencing requirements, such as meeting affordability criteria.
What should I include in my deed of guarantee?
The deed of guarantee will need to underline the guarantor's responsibility if the tenant can't pay rent. It should set out in clear detail the circumstances when the guarantor would be liable for the rent and their overall responsibilities. The guarantor should sign the deed of guarantee and receive a copy of it for their own records.
Do I need an individual guarantor for every tenant?
A guarantor can be used for multiple tenants in the same house as long as they meet the affordability requirements for the amount of the rent agree to indemnify. It's also possible for a tenant to have more than one guarantor on the tenancy agreement, and it may even be beneficial for the landlord to have the rent safeguarded by multiple people.
Is the guarantor’s liability only in relation to the rent?
The guarantor's primary liability is the rent, which they are required to pay if the tenant is unable to do so. The guarantee may also extend to financial losses incurred by violations of other tenancy conditions, such as damage caused by the tenant. When the deed of guarantee is drawn up, it should state everything the guarantor will be liable for if the tenant can't pay.
There may also be a scenario where a guarantor is liable for all the rent in a joint tenancy . This is when a person agrees to be a guarantor for one person in a house of multiple occupation (HMO), but the tenancy agreement actually holds them to the same joint and several liability as the tenants.
Therefore, guarantors should fully understand the extent of their liability before co-signing any tenancy agreement or a deed of guarantee. Failing to do so could see them on the hook for a more significant amount of rent than they initially expected.
What happens if a tenant with a deed of guarantee stops paying rent?
If the tenant stops paying the rent, the guarantor becomes liable for the rental payments. At this point, the guarantor may need to continue paying the rent monthly or the entire outstanding balance of rent due for the duration of the assured shorthold tenancy.
Summary: going ahead with a guarantor
Having a guarantor for good tenants who don't pass affordability checks can be an excellent workaround that allows the tenancy to proceed. However, before agreeing to one, make sure you know how a deed of guarantee functions and that you're clear about the responsibilities of the guarantor. Do that, and you can be reassured that you are protected against any losses, even though hopefully there won't be any need to use the guarantor (because you have a great tenant who pays the rent on time).
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