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 continue 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.