Buy-to-let landlord rent arrears – The rules when getting a guarantor
I’ve seen plenty of buy-to-let landlords who believe they’ve covered any possibility of default or rent arrears by insisting on the tenant providing a guarantor. As with anything that looks too good to be true, having a guarantor is not as simple and straightforward as it first sounds. If you don’t get the guarantor agreement right, then you could still be left whistling in the wind for rent owed to you.
Here, you’ll learn what you need to know about guarantors. You’ll find out when you may need a guarantor, who can be a guarantor, and how to ensure the guarantee is valid. I’ll also list the things that you should discuss and point out to someone considering acting as a guarantor before they sign the guarantor agreement.
What is a guarantor?
A guarantor is someone who is willing to become ‘jointly and severally liable’ for any of the tenant obligations set out in the tenancy agreement. While this means that if your tenant is expected to trim the lawn every two months, the guarantor could be asked to do so if the tenant doesn’t meet this requirement, the real objective is as protection if the tenant doesn’t pay their rent (or other financial obligations).
The term ‘jointly and severally liable’ means that the guarantor could be asked to pay any part or all of the rent due. For example, if your tenant morphs into a tenant from hell and only pays half the agreed monthly rent, you could claim the other half from the guarantor.
You can also call on the guarantor to cover unpaid bills, taxes, and damage done to the property by the tenant.
Why might a buy-to-let landlord need a guarantor?
There are several reasons you might need a guarantor. All of them concern the tenant’s ability to pay their rent. For example, you may need a guarantor if the tenant applicant is:
- A student
- A first-time renter
- On benefits
- ‘Temporarily’ out of work
It may also be the case that your tenant appears to be in stable employment and financially fit, but their credit check is still poor. Perhaps they have recently started a new job and are still under a probation period, or have just returned to the UK from overseas.
If you rent to a tenant who you consider needs a guarantor, you are straight away accepting a higher-risk tenant and one that is more likely to default on their rent. If you really must rent to such a tenant and want the guarantee of a guarantor, you’ll have to make sure the guarantor is acceptable.
Who can be a guarantor?
Generally speaking, four conditions should be applied when accepting someone as your tenant’s guarantor:
- The guarantor must be a UK resident (you’ll need to confirm this)
- They must be in full-time employment (you will need to do an employer reference check)
- If they are self-employed, they will have to prove their income
- They must have enough income to cover the rent and other liabilities (a credit check is advised)
We’d also advise that your guarantor should be a homeowner (though this isn’t an absolute necessity).
As you can see, the work required to vet and accept a guarantor is as comprehensive as the work required when vetting a tenant.
Good buy-to-let landlords warn against being a guarantor
Being a guarantor carries with it a large burden of responsibility. There are a lot of landlords who are so keen to get their property rented that they don’t tell the guarantor about these responsibilities.
A good guarantor is one who is comfortable with the financial onus that is going to be placed upon them. If this isn’t the case, then they shouldn’t be a guarantor – from their point of view and yours. Here are a few things that you should point out to a potential guarantor:
· Being a guarantor is not a two-way exchange of benefits
Other than being a nice person, the guarantor gets no other benefits whatsoever. If the tenant stops paying their rent or has their electric cut off because they haven’t paid the last two bills, the guarantor is liable. It’s an all-risk and no-gain bet.
· The guarantor should be certain of the tenant’s ability to pay
It is an issue of trust. Does the guarantor trust the tenant? I’ve spoken to parents who have been keen to act as a guarantor for their child’s first rental home (usually as a student). When I’ve enquired about their child’s trustworthiness to, say, pay the rent instead of going out on the weekend binge-drinking session, they suddenly change their minds.
· The guarantor is liable for the whole shebang
The big eye-opener for most guarantors is when you put their liability into plain numbers. Let’s say you agree on a six-month tenancy at £700 per month. If the tenant doesn’t pay any of that rent, the guarantor is liable for £4,200. Add in unpaid utility bills and any damage to the property, and the guarantor could be looking at a liability of £6,000 or £7,000 (and maybe more).
When you put the responsibility of being a guarantor in such stark financial terms, it’s surprising how many willing guarantors walk away from signing the agreement.
· Most often, guarantors are forced into being a guarantor
The majority of guarantors are family members. Most commonly parents, but also grandparents, or siblings. They want to help, and that’s a great thing – but many feel forced into doing so. Instead of a logical, well thought-out decision, being a guarantor is usually an emotional obligation.
If things go wrong, could being a guarantor ruin what was once a great relationship?
· Being a guarantor can be emotionally draining
I’ve seen guarantors that break into a bout of panic every rent due day – and it’s not even their rent! They worry about the tenant not paying, and (especially in the case of parents) end up working through the tenant’s finances and balancing budgets on a weekly basis. It’s a level of stress and time commitment they hadn’t bargained for.
Ask the guarantor to consider the worst possible outcome. If this doesn’t cause them stress, then they are probably good to go as a guarantor.
· You have to apply to be a guarantor
Being a guarantor isn’t simply a question of signing on the dotted line. Make the potential guarantor aware that you’re going to invade their privacy, will need proof of ID, and will be running credit checks and probably speaking to employers – all the checks that you would do if they were the tenant themselves.
How to guarantee the guarantor agreement
Assuming that all the above warnings haven’t turned the guarantor ghostly white and that all the background checks confirm that they are a quality candidate, you’ll need to ensure that the guarantor agreement is effective. Here are a few pointers:
- The agreement must be in writing
- The guarantor must sign it
- It must be a legal contract
Remember, too that the guarantor agreement only runs for the duration of the tenancy. If the tenancy agreement is for six months and you roll it over for another six months, the guarantor agreement expires (unless explicitly stated that the guarantee will be renewed).
My advice is always to get tenants who don’t need a guarantor. However, if one is required, working through all the above points will give you, your tenant, and their guarantor valuable peace of mind. Contact one of the Ezytrac team or me today on +44 1522 503 717, and discover more of the strategies we employ to protect our buy-to-let landlord clients from tenants from hell and rent arrears.
Yours in effortless property management,
Brett Alegre-Wood MARLA MNAEA