What Every Director Should Know Before Signing a Lease Suretyship

When a company enters into a commercial lease, landlords will often require one or more directors to sign a suretyship. Many directors sign these clauses without fully understanding the consequences. In reality, a lease suretyship can expose directors to significant personal financial liability.

Before agreeing to sign a suretyship for a commercial lease, directors should carefully consider the legal and financial implications.

What Is a Lease Suretyship?

A suretyship is a legal undertaking where one person agrees to be responsible for another party’s debt or obligations if that party fails to perform.

In the context of a commercial lease, a director who signs a suretyship agrees to personally guarantee the company’s obligations under the lease. If the company fails to pay rent or breaches the lease agreement, the landlord may pursue the director personally for payment. This means that even though the lease is signed by the company, the director may ultimately be responsible for the debt.

Why Landlords Require Suretyships

Landlords often require suretyships because companies, particularly new or smaller businesses, may have limited financial history or assets.

A personal suretyship gives the landlord additional security. If the tenant company becomes insolvent, enters business rescue or simply fails to pay rent, the landlord can recover the outstanding amounts from the director who signed the suretyship. From the landlord’s perspective, the suretyship reduces the financial risk of the lease.

The Extent of Personal Liability

Directors often underestimate the extent of liability created by a suretyship.

Most commercial lease suretyships provide that the director is liable for:

• unpaid rental

• operating costs and utilities

• damages arising from breach of the lease

• legal costs incurred by the landlord

In many cases the suretyship is drafted as a “surety and co-principal debtor” clause. This wording significantly strengthens the landlord’s position.

As a co-principal debtor, the landlord may claim payment from the director without first having to pursue the company.

Liability Can Extend Beyond the Lease Term

Another common misconception is that liability ends when the lease expires.

Depending on how the suretyship is drafted, a director may remain liable for obligations that arise after the lease period, including damages for holding over or costs related to reinstatement of the premises.

If the lease is renewed, extended or amended, the suretyship may continue to apply unless it is formally cancelled or replaced.

Risks for Directors

Signing a lease suretyship can create several risks.

• Personal Financial Exposure

If the company cannot meet its rental obligations, the director may be personally responsible for substantial debts.

• Impact on Personal Assets

Landlords may enforce the suretyship through legal action which can ultimately affect personal assets.

• Liability Even if the Director Leaves the Company

A director who resigns from the company may still remain bound by the suretyship unless the landlord formally releases them.

• Business Failure Risk

If the business becomes financially distressed or enters liquidation, the landlord may enforce the suretyship against the director.

Key Issues Directors Should Consider Before Signing

Directors should carefully review the suretyship clause before agreeing to it. Important questions include:

• Is the suretyship limited to a specific amount?

• Does it apply for the entire duration of the lease?

• Can it be cancelled if the director leaves the company?

• Does it apply to lease renewals or extensions?

• Is the director signing as a co-principal debtor?

Understanding these issues can help directors assess the true extent of the risk.

Negotiating Suretyship Terms

Although landlords often request suretyships as standard practice, the terms may sometimes be negotiated. Possible negotiation points include:

• limiting the suretyship to a specific monetary amount

• restricting the duration of the suretyship

• providing for automatic release if the director resigns

• replacing the suretyship with a larger rental deposit or bank guarantee

In some cases, landlords may be willing to adjust the terms depending on the financial strength of the tenant business.

The Importance of Legal Advice

Suretyship clauses are often included at the end of commercial lease agreements and may appear routine. However, the legal consequences can be significant.

Before signing a commercial lease that includes a suretyship, directors should ensure they fully understand the obligations they are undertaking.

Professional legal advice can help identify potential risks and ensure that the suretyship terms are fair and appropriate.

Need Assistance With Commercial Lease Agreements?

Lease suretyships can expose directors to substantial personal liability if they are not carefully considered.

The attorneys at Barter McKellar can assist with reviewing, negotiating and drafting commercial lease agreements and suretyship clauses to ensure that your interests are properly protected. If you are entering into a lease or have been asked to sign a suretyship, our team can provide practical legal guidance tailored to your situation.