Innovative rental guarantee scheme offers new form of security to commercial landlords in the UK

Correlation Risk Partners, has teamed up with Nordic Guarantee, to launch a unique new rental guarantee product aimed at alleviating the need for tenants of commercial or industrial premises to provide cash deposits with landlords to secure their lease obligations. The product is being marketed under the name of Correlation Guarantee.

Many commercial and industrial landlords require a cash deposit of up to 12 months rental from all but prime corporate tenants. Nordic Guarantee, a Swedish short term insurance company which is one of the largest issuers of financial guarantees for the construction and travel industries in Scandinavia, is offering its guarantee as security to UK landlords in place of a cash deposit. Instead, the tenant pays a monthly guarantee fee to Nordic for as long as the guarantee remains in place.

This guarantee frees up valuable cash resources for a tenant (or avoids using its valuable borrowing facilities) which would otherwise be unproductively tied up for lengthy periods of time. If the tenant fails to make payments under its lease, Nordic steps up and makes the necessary payment.

Peter Gower, COO of Correlation Guarantee states:

“We think this product has advantages for both tenant and landlord, and consider it to be unique in this segment of the market. We expect its appeal will grow rapidly, especially if market conditions continue to soften, and if interest rates start to rise”.

Importantly, this new venture also assures landlords that the financial position of their tenants is being monitored by Correlation Guarantee during the tenancy.

Peter Gower explains:

“The guarantee is designed to cover the same events of default that would be covered if the landlord was holding a cash deposit. It therefore covers not only defaults in rent payments but other possible breaches by the tenant, including dilapidations.” The product is normally offered in support of businesses (or stakeholders ) with a good track record rather than start-ups, for tenancies with a minimum term of five years, and where the security deposit required is between £100,000 – £750,000.

“Nordic will however look at larger rent guarantees, although these may have to be referred to underwriters”, says Gower.

“We will also consider situations which will enable cash currently on deposit with the landlord to be freed up for use in the tenant’s business, such as a corporate restructuring. Furthermore, the guarantee can be issued as a portion of the security required by the landlord, or in other circumstances where a form of credit enhancement is required by the landlord.”