Should landlords be looking for the security of a guarantor for new tenants?
Landlords we are all aware of the deteriorating economic climate. Rents have been falling although the latest figures show some signs of stability in average rents, and tenant unemployment is an increasing and potentially growing problem for landlords.
Landlord insurance – insure your rent – discounted rates
We have been warning landlords for some time that they might want to consider rent guarantee insurance to protect themselves against tenants defaulting on their rent.
Protecting your rent
There are other measures that savvy landlords can use to protect their rent as well as tenant guarantee insurance. This is by a landlord using a guarantor. A guarantor undertakes to pay the rent of the tenant if they stop making rental payments. Essentially it creates a safeguard from a third party who underwrites the tenants rent and provides a buffer against default.
Traditionally guarantors have been used by a landlord when letting to student tenants. It is also synonymous with younger tenants. This is because in both cases the tenants may have limited or no credit history which makes carrying out a tenant credit check pretty pointless.
However, increasingly landlords should consider them when they perceive that they are taking on an unacceptable risk. For instance where a tenant is in a volatile economic sector or just passes the tenant reference.
The current harsh, economic environment means that landlords are more exposed than ever because of the financial fall out. A tenants guarantor needs to have a good credit score in order for them to perform their role effectively. Landlords will need to have ensured that the tenants guarantor has been adequately referenced and ideally they should be a homeowner, which means that they have collateral behind them, should the landlord need to take legal action to recover their rent.
An expert on executing a guarantor agreement is Terry Samuels who has been using them for years in his student lettings business.
He advises landlords to use the following documents:
1. Guarantor Letter
2. The proposed Tenancy Agreement
3. The Deed of Guarantee
4. Guarantor Application
“I send two copies of each of the above. One they keep and the other they return.
The guarantor letter is by way of introduction. I consider it essential that they return a signed and dated copy of the proposed tenancy agreement, so they cannot claim they haven't seen it. Then there is the Deed of Guarantee - this must be a Deed, which is signed, dated and witnessed to have the force of law behind it.”
The other advantage of using a guarantor is that it mitigates against the need for a landlord to take a tenancy deposit. A landlord is well within their rights to charge an admin fee for setting up the tenancy. With the security of a legally executed deed should a landlord need to make a charge for any damage to their property they can claim against the guarantor.
If a guarantor defaults then they could potentially find themselves with a CCJ if the landlord’s legal action through the small claims court is successful and they fail to pay up. This will certainly scare the hell out of nice upstanding middle class individual who need a good credit score to enable them to access credit to buy a car or secure a mortgage.
The ideal guarantor ‘ Big John ‘
It was recently pointed out to me by a letting agent friend that as well as the upstanding middle classes being the ideal guarantor the other model guarantor could actually be ‘Big John’
John is 6ft 5’, tattoos and works out. It’s fair to say nobody messes with ‘Big John’.
On the face of it a landlord would think “I don’t want to deal with this guy.”
However, he could well be a landlord’s best tool for keeping rents up to date.
For example, the tenant stops paying. You send the tenant a letter with a copy to ‘Big John’. Still no rent, so you go reluctantly to ‘Big John’ for the money as the tenants guarantor.
Now ‘Big John’ ain’t happy that he has to cough up money for the tenant and also potentially face damaging legal action in the courts.
Landlords who chase tenants for rent by apparent innocuous actions such as phoning or faxing them at work could be prosecuted for harassment. ‘Big John’ on the other hand unencumbered by the vagaries of the ‘nanny state’ legal system. Pays the tenant a little visit and ‘reminds’ them of their tenant duties to pay the rent. Low and behold the tenant finds the readies and the tenancy is suddenly back on track!
Landlords wishing to view a copy of Terry Samuels guarantor forms can now view them within the Property Manager. To create a deed of guarantee you will need to have added a property and a tenancy. The guarantor letter and application form are available to download under the standard forms.