Author James Griffiths

Issue Spring 08

Publication IoD

The arrival of the Companies Act 2006 has brought into focus how a director should act to promote the success of his or her company, but a company director should also consider the personal duties and obligations of a director.

In the present difficult trading environment and uncertain markets, a director’s personal liability should not be ignored. There are many circumstances in which a director’s individual liabilities can arise, but the following three examples are common considerations in commercial property transactions:

Security on taking a lease

Even if a prospective tenant company has an established trading record the landlord or its agent will often look for collateral security to underwrite the performance of the company’s obligations as tenant under the lease. Commonly, this will lead to discussions on directors’ guarantees. It should be borne in mind that a director would guarantee all the tenant’s obligations under the lease to include repairing and decorating covenants and breaches of any statutory duties, not just the payment of rent. It may be preferable for a tenant to offer a rent deposit instead, although a rent deposit equivalent to, say, somewhere between 3-9 months passing rent is not an insignificant sum, but a director may prefer this to any personal liability. Plainly for a start-up company tying up such funds may be difficult.

Lease guarantees

If, when a company entered into a lease, a director acted as guarantor, then on assignment of such a lease to a third party, the outgoing tenant company and its director may be required by the landlord to enter into what is known as an authorised guarantee agreement. The effect would be that the director personally guarantees the performance of the obligations of the assignee as successor tenant, and these guarantee obligations could continue for some time.

Bank guarantees

Primarily an issue for smaller or start-up companies needing to fund business investment or purchase property with bank support, the bank may look for personal guarantees from directors, which could also extend to a second charge on the director’s house. Plainly such a guarantee should not be considered lightly, and any cohabiting spouse or partner may need independent legal advice if a jointly-owned property is to be put up as security for the liabilities of a company not controlled by all owners of the house.

Ideally, advice should be sought on any proposed form of guarantee before its completion, as concessions may be obtained through negotiation.

If a director’s personal guarantee is given, it is wise to monitor this carefully and consider these aspects if the control and ownership of the company changes.

Also, a director should periodically assess his or her exposure, at the same time as assessing the strength of the company. If the company grows in strength it may be possible to release the personal guarantee. As with many obligations nowadays, a periodic risk assessment is prudent.

James Griffiths, Partner

Commercial Property Department

Tel: 01284 762331

Email: james.griffiths@ashtongraham.co.uk

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