A third party, guarantor or indemnifier, undertakes to be responsible for tenant’s obligations upon default.
Real estate practitioners involved with commercial leases often encounter landlord requirements concerning guarantors or indemnifiers. In leasing, a guarantor is requested to sign appropriate documents assuring the landlord that, in the event of default, he/she is responsible for the default of the lessee. Landlords may request that an individual agree to an indemnification agreement rather than simply being a guarantor.
A person signing an indemnification agreement becomes an indemnifier. As such, he/she assumes a broader scope of liability.
Historically, a landlord would seek a guarantee when a corporate tenant lacked sufficient assets to fund any default. However, such a guarantee involving a third party is limited, as it extends only to the tenant’s obligation. If the tenant is deemed by law to have no obligation, then the guarantor is released as well from its obligation.
For instance, if a tenant is adjudged bankrupt, then the tenant has no on-going obligations pursuant to the lease. If the guarantor has simply guaranteed the obligations of the tenant and the tenant becomes bankrupt, then the guarantor is not required to pay (as the tenant no longer has liability pursuant to the lease).
In recent years, indemnities have grown in popularity. This arrangement provides that the indemnifier agrees to indemnify and hold harmless the landlord against any damages that may result from the tenant’s failure to perform its obligations pursuant to the lease.
Indemnity agreements normally go further and imply that the indemnifier is a covenantor pursuant to the lease in the same sense as the tenant and that this indemnity survives any bankruptcy or insolvency of the tenant.
Such agreements also typically provide that the indemnifier, upon the failure of the tenant to perform pursuant to the lease, is deemed to be the tenant and subject to all the covenants contained in the lease. Accordingly, the prudent landlord will have, where appropriate, an indemnity agreement in place with the proposed guarantor, as opposed to a straight guarantee.
Another method to protect the landlord is the creation of a co-tenancy. Essentially the proposed guarantor becomes a co-tenant with the tenant and is jointly and severally responsible for all obligations of the tenant pursuant to the lease. The landlord can then look to the co-tenant in the case of the bankruptcy or insolvency of the main tenant.
Brian Madigan LL.B., Brokerwww.OntarioRealEstateSource.com