A Personal Guaranty in a Commercial Lease
When a business decides to rent an office, storefront, or other commercial property, it is the business itself that enters into a lease. The business, which may be a corporation or limited liability company (LLC), is a separate entity from its owner or owners. When the business enters into a lease, it is the only party responsible for paying rent and upholding the provisions of the contract – not the corporation’s shareholders or LLC’s members.
Of course, the business owners prefer this. If the business goes under, the owners can walk away. They are not personally responsible for the financial obligation. But the lessor may think differently. Many commercial property owners will require a personal guaranty within the lease, especially for small or young businesses. This personal guaranty gives the lessor someone to go after if rent does not get paid and the business insolvent.
What is a personal guaranty?
A personal guaranty may be a distinct provision within a lease or a separate document executed at the same time as the lease. This provision or document identifies one or more people who are individually offering a guaranty for the lease. They are promising that the business will uphold the lease, and if it does not, they will be personally responsible for maintaining the lease. If the business defaults, particularly in regard to paying rent, the commercial lessor can go to the guarantors for the payment. If the breach leads to a lawsuit, the lessor can name the guarantors within the suit, and they usually can be held jointly and severally liable for any settlement or court award.
Landlords Want Personal Guaranties
It is almost always in the landlord’s interest to have a guaranty. To begin with, having a personal guaranty ensures the lessee does everything in its power to keep the business profitable. The business owners may be less likely to make risky decisions. This makes it more likely the business will uphold its lease.
The business owners are less likely to damage the commercial property if the owner is on the hook for the cost of the repairs.
If the business fails and the lessor can quickly re-let the space, then the lessor may have no interest in going after the guarantor. However, if the market is not doing well or rents have fallen, then the landlord may pursue payment from the guarantor. The lessor can also go after a guarantor’s assets for payment.
Should You Sign a Personal Guaranty?
Whether or not to sign a personal guaranty can be a tough decision. Without the guaranty, the lessor may deny you the space, and then your commercial real estate hunt continues. However, if you sign the personal guaranty, you could be on the hook in the future for a significant amount of money. Personally, the cost of a broken commercial lease could be personally devastating, especially if the lessor goes after your personal assets, such as your vehicles or house.
You should always speak with an experienced commercial real estate lawyer before signing any commercial lease with a personal guaranty. You may have the option to refuse a personal guaranty and a find a lease that will enable the business alone to sign a lease. You may also be able to offer a Letter of Credit from a bank or credit union instead of a guaranty.
You may also be able to defeat a request for a personal guaranty by enabling the landlord to view the business’s financial records with a confidentiality agreement in place. This enables the lessor to have a better view of the business’s ability to pay.
Additionally, if the business is able to. You may be able to negotiate the use of a sizeable security deposit that the landlord can use in the event of a breach of the lease.
However, if signing a personal guaranty seems like your only or best option, there are still ways to protect yourself. One way to protect yourself is to negotiate a limit on the personal guaranty, either a duration of what you can be held responsible for or a maximum dollar amount. The landlord should also be required to mitigate damages by making a good faith effort to find a new tenant.
Call a Lawyer Today
If you are looking into renting commercial property for your business, speak with a West Palm Beach commercial real estate attorney at the Law Offices of Larry E. Bray, P.A. An experienced attorney can help you review and negotiate a commercial lease to ensure you enter into a fair deal. He can also advise you on the benefits and risks of a personal guaranty.