What does a guarantor have to guarantee?

I will not reveal any names, but in the past 24 hours I have repeatedly asked myself this question: what is a guarantor, in a case of a rental lease agreement, supposed to guarantee? And I would be interested in hearing from those of you who either have been guarantor in the past of have had to present one upon signing a lease… Why am I asking?

A good and indeed very much trusted friend of mine asked me to be a guarantor for him to be able to sign a lease for a shared-with-a-friend apartment in Manhattan, which naturally is somewhat pricey and given the rule of thumb that one needs to make at least 40 times the monthly rent in annual gross income, he needed someone to underwrite as guarantor. Now, while it certainly might already seem risky enough to vouch for that amount of money, I was willing to do so, but was then faced with legal language on a form–clearly not written by my friend–that simply seemed to ask for just too much. Here is an online form with almost identical language to the one I was given, and, after trying to give my opinion on what I was thinking a guarantor’s role is, I will try to point out what made me feel most uncomfortable about the language in this particular form.

So, what is the role of a guarantor? Well, in principle I would assume that it works a bit like an insurance. The landlord has invested some money into a property that he or she is renting out. As part of the renting agreement a regular, usually monthly payment is made, the rent, which can be considered as the return dividend or interest on the investment. Naturally, just as with every investment, there is an associated risk, and the landlord wants to minimize the risk by ensuring that the tenant is likely to be able to pay the rent, all of it, and on time. He thus places certain rules upon the tenant, such as that the gross annual income exceeds 40 times the monthly rent. And that’s where the insurance comes in, at least in my understanding of how it’s supposed to work. Should the tenant become insolvent, the landlord wants someone to be held liable to pay the remaining rent, right? In that case the insurance should, at most, be reasonably limited to the amount the landlord would obtain if the insurance were not being used. But what does the agreement form I received say…

First of all, from the language in the first clause it would seem that the owner or landlord does not see the sole risk of insolvency of the tenant in not being able to collect the rent, for otherwise the part “without being limited to the payment of rent” seems odd. Unfortunately, the language does not give any clear indication as to what other claims the landlord might have or come up with. And while it might seem standard legalese, I find it always very dangerous to agree to paying for something if I don’t even know what that something is or how much it might cost.

Next, clauses six and seven (6, 7) seems to suggest that the landlord might, without “making demand”–which could mean giving notice although I’m not sure, I didn’t find a definition of this term–decide to send further requests for payment to the guarantor. At least the part “without first making demand against Tenant and¬†without first bringing any action or proceeding against Tenant” seems to suggest to me that once I were to sign this agreement, the landlord can simply choose who to “make demands against”. And the guarantor, that is I, would have to agree to not requiring any proof to be presented by the landlord that payments were, indeed, not made.

And finally, clauses eleven and twelve (11, 12) read like an invitation for the landlord to try and conjure up some interesting “expenses” which the guarantor would have to cover without been given the opportunity of a trial–instead I assume simply a summary judgment would be made–while all legal fees, if the case were won by the landlord, would have to be paid by the guarantor on top of losing. Well, naturally the landlord would find a suitable attorney for such a venture!

In short, while this instrument of a guarantor agreement is certainly a wise precaution on the side of the landlord against tenants who, despite their best efforts, might simply be unable to (fully) pay the rent for the agreed term of the lease, this language seems to remove any risk, at least in terms of financial risks associated with not being paid in form of rent, from the landlord while at the same time adding substantial risk to the guarantor, namely that of scrupulous landlords trying to pull a fast one in reverse.

And as any good insurance agreement most certainly has a clause limiting the overall amount of liability, I find it only fair that if a natural person plays the role of guarantor, there equally should be measures in place to prevent fraudulent action on the part of the landlord. Which brought me to a final, interesting idea:

Wouldn’t it be an extremely interesting business model to actually offer professional guarantor services? Just like a regular insurance company, you would perform a background check and then ask your clients, i.e. wanna-be tenants, to pay a premium, say somewhere between 2 and 5 per cent of the monthly rent depending on the result of the background check, and in return underwrite and ensure that should the client become insolvent you, the insurer, will continue any outstanding rent payments as specified by the lease. Naturally, the liability would then, indeed, be limited to the rent and for any other eventuality, such as damage to the property based on negligence or criminal intent, the landlord would not be able to make any claims, but my assumption is still that the true intent of a guarantor agreement is to ensure the rent, not any much less likely cases, especially since a typical background check by a landlord can hardly reveal potential for future cases of negligence or accidents.

Additionally, such a business, the professional guarantor, could offer subsidized legal advice for its clients, the tenants, in case landlords were to be slow to react to reasonable demands or create otherwise unacceptable conditions… And I am sure that there are quite a few tenants out there who wouldn’t mind having a company having their back when it comes to landlords and building managers who aren’t always “up to speed” with fixing reported problems or ensuring their tenants well-being.

For my friend, I truly hope he and his friend find a new apartment; it turns out the broker seemingly didn’t like all the fuss I made about this form and the apartment went to someone else…

Oh, and by the way, there are guarantor agreement forms out there with much less legalese!

2 thoughts on “What does a guarantor have to guarantee?

  1. I like this idea very much. The next step following this line is to ask the question: what does it take to actually become a professional guarantor? If we could narrow down some of the core parameters, this may indeed transition into reality!

    • Given that I don’t think you can “patent” this idea–it’s really like an insurance, only in a different area–I think it’s safe to philosophize about requirements and practical steps as well as obstacles in public…

      The initial thought that I had was for such a business to be for-profit, but that is of couse not a necessity. But regardless of whether this “business” were non-profit or for-profit, one of the requirements would be to have someone with at least the capital to make sure the business could work as a guarantor in practice, such that landlords can actually look up the business in court and be assured that they would indeed get their money in case of a tenant’s insolvency.

      And since my friend, who needed and possibly still needs the guarantor, is a Columbia grad student, I am now very much in favor of trying to find some people at the Columbia Business School, probably in collaboration with someone from the Law School, who have at least some experience in both insurance and insurance law as well as the interest in possibly starting this up as a university service for students and non-faculty staff. The initial capital to be set against claims would then have to be “pledged” by the university, but given that it would only have to be paid out in cases where there is an actual problem, such as a loss of income of the tenant, which is also “in control” of the university, my guess is that the risk assessment is much more favorable.

      Once these initial steps of finding someone interested enough to put their efforts into it and convincing the university that this would be a true added-value for their students and staff, the next thing to do would probably be to come up with an actual business plan, covering everything from how the risk management works, how funds are being managed, whether or not to advertise, if any what side services to offer next to the insurance, etc. Importantly, this could even be devised as an MBA master’s or J.D. project for one or several students at Columbia, because this phase could be devised in such a way that the outcome, the master business plan, can potentially be adopted by other big employers. Just imagining that some/many/most/all big NYC employers were to offer guarantor services to their employees, then of course for a much lower fee than an external service, is awesome. It might truly be a win-win-win situation, where the employee/student/tenant has the peace of mind they won’t be dragged into bankruptcy, where the university/insurance service will survive and potentially make small profits, where landlords can be assured that their claims will be taken care of within reasonable limits, and where the housing market even has the potential of becoming a bit less “random”: with enough bargaining power, such a guarantor can then actually enforce certain rules on side of the tenants. It would, in effect, be like a tenant union! (oooohh, I said the U word, bad, bad me!)

      What do you think?

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