Personal Guaranty on Commercial Leases
Some commercial landlords insist that a business owner provide a personal guaranty as a condition of its lease. But what exactly is a personal guaranty of a commercial lease, and should the business owner agree to this term?
When banks issue loans to start-up businesses, they will often require a personal guaranty of the loan because the new business has no track record and likely has insufficient assets. This personal guaranty is an agreement by the individual that he or she will be personally liable for the loan if the business doesn’t make payments or otherwise defaults on the loan.
In a similar manner, many landlords require a personal guaranty of commercial leases, especially from start-up businesses. The lease agreement is a major commitment, and the landlord wants to know that those payments are covered even if the business does not succeed.
A personal guaranty becomes particularly important in the event that the landlord has made upgrades or renovations to the property in order to suit the tenant’s business. These changes might not be suitable for the next tenant. So, the landlord needs assurance that in the event that the tenant is unable to pay the rent or the business fails, the landlord will be able to recoup some of these costs and expenses.
Before accepting the personal guaranty, the landlord will usually require a financial statement and credit check of the person agreeing to guaranty the lease to ensure that he or she indeed has access to resources to cover lease payments and expenses.
Some negotiation might be possible. While a personal guaranty on commercial leases has become more common – almost standard in many locations – since the 2008 real estate bubble burst, that doesn’t mean there isn’t room for negotiation. Tenants can often negotiate the following conditions in order to minimize the impact of the personal guaranty:
● A limit on the dollar amount of the guaranty
● A time limit on the guaranty which might be shorter than the length of the lease
● Putting a letter of credit in place, for an agreed dollar amount
● A guaranty to pay rent for a set period of time after early termination of the lease, giving the landlord time to find a new tenant
Local and state regulations. As with any other terms of a commercial lease, a personal guaranty will be subject to local and state laws governing commercial real estate. Before entering into a personal guaranty of a commercial lease, call our real estate attorneys for advice. We can help you understand the terms and implications of the guaranty, or potentially negotiate an arrangement that is satisfactory to you.