When you sign the lease as the tenant, you are guaranteeing payment of the rent and performance of all the other obligations in the lease, possibly for as long as the lease is in existence.
You are literally putting your home on the line.
Perhaps you are scraping together just enough money to get your business off the ground, and you don’t even have a house of your own. So this risk doesn’t worry you. But if everything goes well, in a few years you will have a house, and a family, and then you will worry about your home being on the line.
Nobody knows what the future may bring. Who anticipated the Covid 19 crisis? So it’s best to think about how to minimise your risks right at the start.
The answer is to put forward a limited company as the tenant, not yourself personally. If you are just starting out, that will probably mean setting up a limited company – a “£100 company” as they are often called, because that’s the usual minimum share capital. (They are also referred to as “shell companies”, because there is nothing in them.)
However, landlords often accept companies, even completely valueless ones, as tenants. It’s a common fact of life that people expect to limit their personal liabilities when starting businesses. That’s why limited companies were invented in the first place, in the coffee houses of the City of London, to enable entrepreneurs to take a risk without risking everything. That’s also why the government has organised bankruptcy and insolvency law so that people can be entrepreneurial, lose, and quickly start again.
So there shouldn’t be too much shock and horror when you propose using a company to hold the lease. However, landlords have their own risk to cover. It’s reasonable for them to want to cover at least the loss of rent they would suffer between your business possibly going bust and them being able to start getting rent from a new tenant. For that reason, expect that landlords will require you to put up a rent deposit – for example, three months’ or six months’ rent – as a security which they can draw upon if your business fails to keep up payments.
That’s the quid pro quo. You may not like the idea of putting up that extra money, and it may be hard for you to raise it right at the start, when you have to pay for so many other expenses for getting your business going. But it’s a worthwhile investment in your future security and peace of mind.
Landlords will often demand personal guarantors for limited companies. That should be resisted. If you become a personal guarantor for a new shell company tenant, that rather negates the point of having it. However, even here, there are advantages to be had over simply being a personal tenant. It may be possible to negotiate various limits on the guarantor liability. For example, it could be capped at a certain amount, or the guarantee could be released after the business has been trading successfully for a period of time. Those concessions couldn’t be negotiated with regard to personal tenants.
It’s a worthwhile investment in your future security and peace of mind.
But fundamentally it’s best to use a limited company or an LLP, from the point of view of protecting your assets, present or future . You ought to be obtaining accountants advice, of course, as to what is the best structure for the business. You should be obtaining legal advice on the best protection from your security point of view and to negotiate and agree the best terms.
People are sometimes put off using a shell company just by the small cost and hassle of setting up a company – they think it’s a much bigger deal than it is. It can be done now with a few clicks on the keyboard, and at a very small price. There is the annual cost of accountants to file accounts at the Companies Registry, but that is a small price to pay compared with the peace of mind you will be enjoying.
Nobody knows what the future may bring. Who anticipated the Covid 19 crisis? So it’s best to think about how to minimise your risks right at the start.