Commercial Leases: Negotiating the Personal Guarantee

By
Real Estate Agent with Oregon First

Commercial Leases: Negotiating Personal Guarantees

When entering into a commercial lease, the Landlord often requires a personal guarantee from the business owners, even if they have formed a corporation or LLC, and may refuse to rent the space without one. This means that the guarantors will make the lease and other payments if the business fails. Landlords often ask for a personal guarantee from start-ups and other small businesses. This is a risk for small business owners because the company is usually their sole source of income. Bankruptcy becomes a very real option, because if the company cannot meet its expenses, it is unlikely that the owner can continpersonal quaranteesue to pay them. However, if you are a credit rated business with experience, demonstrated growth, and a strong balance sheet, you may be able to convince the Landlord to waive the personal guarantees.

Personal guarantees may be unavoidable, but there are ways to limit their impact. A Landlord may accept a "good guy" guarantee. This makes the guarantor liable until the tenant leaves the premises, even if it is before the lease is up. The Landlord will not enforce the personal guarantee if the company is going out of business and the rent is paid up. The business may still be liable for the rest of the term of the lease.

You may be able to limit your personal guarantee to the amount of the Tenant allowance the Landlord offers. If the Tenant receives $40,000 dollars from the Landlord to make leasehold improvements, offer to guarantee this sum on a sliding scale. The personal guarantee would be for the entire $40,000 the first year and decline by $8,000 each year, assuming it is a 5 year lease. Point out that you are putting additional money of your own into improving his building and you will never be able to remove these improvements.

Since most business fail within the first two years, negotiate to limit the term of the guarantee to the first two years only, provided all rents and other payments are up to date. If the Landlord balks, offer to allow your financials to be examined to determine the strength of the company. The guarantee will be waived if sales are improving and expenses are under control.

Many times the Tenant leases a space because of the reputation of the Landlord for fairness and fiscal responsibility. This Landlord keeps Tenants happy and maintains the building to high standards. Negotiate for your personal guarantee to terminate if the building or your lease is sold.

Keep in mind that if more than one person guarantees a lease, and they leave the business or their share is bought out, their personal guarantee is still valid and enforceable by the Landlord.

This article does not constitute legal or financial advice. Leases and personal guarantees are complicated legal documents. Seek qualified advice from legal and financial professionals before signing any documents.

Wayne B. Pruner is a Realtor® at Oregon First, who works in the Portland and Tigard, Oregon area. He is ready to help you with all your real estate needs. His phone number is 503-891-0795. Here are links to his real estate website and his real estate blog.

 

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Wayne B. Pruner, GRI, Realtor, Principal Real Estate Broker - Oregon First

Mobile phone: 503-891-0795

email: Ā waynepruner@oregonfirst.com

website: Tigard Oregon Homes

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Anonymous
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Before real estate I managed 18 commercial properties for a corporation as an officer. The advice I got from our corporate attorney early on was "NEVER ever sign a personal guarantee for business purposes!".

I have always followed this advice & referred it to many persons considering doing this. Once you sign on the dotted line of a personal guarantee you're committed. It will follow you for as long as it takes for them to get their money one way or another. From an experienced business person "Personal guarantees are death!'. Do NOT ever sign one except for personal real estate.

May 03, 2008 07:44 PM #1
Anonymous
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Anonymous
BTW, I forgot to add, the leases for the 18 properties, all commercial were in the San Francisco bay area & none had personal guarantees. If a landlord insists then offer more money [but forget the guarantee]. They'll usually go for more bucks in lieu of & if not just go elsewhere.
May 03, 2008 07:46 PM #2
Rainmaker
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Wayne B. Pruner
Oregon First - Tigard, OR
Tigard Oregon Homes for Sale, Realtor, GRI
Vincent: You are absolutely right to avoid personal guarantees if at all possible. Offering more money for rent may be a way to overcome this. This trades a tangible outcome, increased expenses, for an intangible event that may never happen: enforcement of the personal guarantee. I compare it to insurance you pay for, but may never use, but offers peace of mind. It then becomes a business decision to lose this prime location, increase my expenses, limit the personal guarantee, or accept an inferior location. Personal guarantees are only "death" if the business fails.
May 05, 2008 12:26 PM #3
Anonymous
Anonymous
Anonymous
All valid & accurate points on your part as well. The problem is you never know what the future holds, esp. in business. I know of several instances where people signed "personal guarantees" thinking it was "no big deal" & something did happen. One was by the principles of a thriving business in San Francisco which had been around for 40+ years. Through a series of unfortunate events, the business folded & the principles were on the hook for the lease with years to go. The case ended in court & the principles lost owing the landlord the balance of rent, for which they had to refi their houses in order to pay it off. Unless there's a gun to your head or your Bill Gates, run the other way!
May 05, 2008 01:19 PM #4
Rainmaker
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MeLisa Minter
Carl Thomas and Associates Real Estate - 972-962-2500 - Kaufman, TX
Broker, SFR, Kaufman County Short Sale Specialist

Hi Wayne,

Thanks for this information.  I've never done commercial leases and am in the middle of writing a Letter of Intent for a tenant needing medical space. 

I may need to contact you for guidance if that's ok?

Oct 24, 2010 07:29 PM #5
Rainmaker
261,532
Wayne B. Pruner
Oregon First - Tigard, OR
Tigard Oregon Homes for Sale, Realtor, GRI

MeLisa, I will help you if I can. You also need to seek the advice of your Supervising Broker.

As we speak, I am working on a letter of intent for a restaurant lease. Some key points to remember:

  • Non-binding until a lease is signed
  • Lease is subject to final attorney approval
  • Lease is subject to approval of all building permits
  • Client has obtained professional legal, financial, and construction advice

Medical business seem to be the majority seeking new space right now. Good Luck.

Oct 24, 2010 08:31 PM #6
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