As part of establishing their company’s premises, a director will often sign a lease guarantee with the landlord. This guarantee covers the company’s obligations for things such as:
- paying rent during the term of the lease
- making (or paying for) repairs to any part of the premises damaged during the lease period
- the cost of making good the premises when they vacate
That’s all well and good while the company is doing well, and has the funds to cover these costs. But what happens when the company goes into liquidation?
The Liquidator takes their share
Once the company has gone into liquidation, any amount the landlord claims with regards to the lease agreement must be paid by the company itself. Apart from a few exceptional circumstances, the Liquidator isn’t liable for any money the company owes the landlord.
As part of their work, the Liquidator will promptly remove the company’s assets from the premises. However, they are under no obligation to clean or make good the premises once they’re done. This means the company’s premises may be in bad shape by the time the Liquidator has left.
And when they do leave, the Liquidator will then disclaim the lease, effectively handing control of the premises back to the landlord.
The director deals with what’s left, or tries to
Once their company is liquidated, directors with guaranteed leases are usually liable for:
- all outstanding rent at the date of liquidation
- rent for the time the liquidator occupied the premises
- the cost cleaning, repairing and making good the premises
- any costs the landlord incurs to re-let the premises
- all unpaid rent for the remaining period of the lease (although the landlord may have to re-advertise the premises and reduce their claim by whatever they receive from the new tenants)
As you can imagine, these costs can add up to a significant amount. If the director can’t pay them or negotiate a settlement, it may result in bankruptcy.
So if you’re a director, how can you avoid potentially becoming bankrupt if your company goes into liquidation? Well, that depends whether or not the company is already in liquidation.
What you can do before liquidation
If you’re at the stage where you’re still negotiating the terms of the lease, see if the landlord will accept either (or both) of these options:
- A cash security deposit or bank guarantee (instead of a guarantee from the directors)
- Some form of limit on the guarantee, such as a fixed maximum amount or limited period.
And if you’ve reached the stage where you’re considering placing your company into liquidation, think about the liability you’ll have under any lease guarantees. It may be better to keep trading for the rest of the lease period, rather than immediately liquidate the company. You (and any other company directors) may even need to personally lend funds to the company so it can continue trading.
Alternatively, you can try to sell the company’s business on terms that require the buyer to take over the lease, therefore hopefully avoiding future lease liabilities.
Important note: In these circumstances it’s vital that you consult with qualified professionals.
What you can do after liquidation
Once your company has gone into liquidation, you only have a few options:
- Do nothing, and see if your landlord, takes action to recover the amount payable
- Pay the amount owed to the landlord
- Negotiate a commercial settlement of the landlord’s claim
- If the landlord does take action and you are unable to pay the amount due or negotiate a commercial settlement, consider filing for bankruptcy or proposing a personal insolvency agreement
How to negotiate the settlement of a landlord’s claim
When your company goes into liquidation, your landlord may be open to settling their claim under a personal guarantee. Pursuing these claims can be costly for them, and directors often have other personal liabilities arising from the company’s liquidation, making a landlord’s recovery prospects uncertain at best.
How we can help you
Over the years we’ve helped a number of company directors negotiate settlements of claims by landlords for personal guarantees, often for significantly less than what the landlord was originally claiming.
And we can help you too.
Of course, prevention is always better than cure, and we hope you can mitigate any possible claims from your landlord before your company gets into financial trouble.
But if your company is already in trouble, and you’re facing a personal guarantee claim, don’t hesitate to get in touch with us. We can give you the help and advice you need to minimise the damage where possible.