What to do about a Personal Guaranty in a Retail Commercial Lease
If you are attempting to lease a retail commercial space, one of the the numerous things to negotiate is the tricky subject of the personal guaranty. It is tricky because property owners have justification for asking for a Personal Guaranty. Naturally, a lessee (tenant) would prefer not offer a Personal Guaranty. In this post, we’ll discuss some of the things that can be negotiated to satisfy both the landlord and lessee.
In simple terms, a personal guaranty is obliging one’s personal wealth to ensure that the financial commitments of the lease are fulfilled by the lessee (tenant). In most states, it means that the Landlord can go after the lessee’s personal real estate holdings to collect payment on a defaulted lease agreement. Naturally, who wants to pledge their house and other personal belongings to guarantee a lease. Nobody? That is why you can form a corporation or a Limited Liability Entity (LLC or LLP) to be the lessee.
But, still, if the corporation or LLC/LLP has not been established for a long time, it’s history and credit rating may be too weak to sufficiently satisfy a landlord. If this is the case, a landlord will naturally push to get a personal guaranty from the prospective lessees. So what potential compromises can be reached to satisfy both parties on the matter of a Personal Guaranty?
The Length of the Personal Guaranty Period
Try to get the Personal Guaranty to be for a period shorter than the length of the full lease. For example, if your lease is 10 years long, you can try to negotiate a clause that the Personal Guaranty is only effective for the first three years or so of the Lease. In case there is some sort of lessee default prior to the expiration of the Personal Guaranty period, then the waiver of the Personal Guaranty can be delayed or perhaps canceled. The way that this makes sense for both parties, is that 36 months is a good amount of time to determine if the business is going to be financially viable. Most businesses that do not succeed, will have closed operation much sooner than 36 months.
Get the Personal Guaranty Removed when the Lease is Assigned to a buyer for the business
Try to get the Personal Guaranty to be waived upon transfer of the lease to a new buyer or operator of your business. Who wants to be stuck guaranteeing a lease for a business that you are no longer going to be running? If your landlord won’t insert a clause that removes you as a guarantor upon assigning the lease to a buyer, then you can suggest being kept as a guarantor for a short period after the assignment, let’s say for a 12 to 24 month period. For sure you want to be removed as a guarantor when your buyer exercises a new option term, which they may have to negotiate new ones for themselves anyway. The way this works for the landlord, is only if the assignee to the lease is a strong and qualified operator of the business. So when a business owner is looking for a buyer, it is always important to consider how the landlord will react to the buyer.
Offer a Larger Security Deposit to get the Personal Guaranty Waived
Offer a larger security deposit in lieu of the Personal Guaranty. This tactic has a one major flaw for a lessee. That is if it is accepted by the landlord, it means that you are tying up capital and making it essentially non performing, as it will not accumulate interest or be available for working capital. But, it may be a more palatable option to the sense of dread that a personal guaranty may conjure up emotionally for you or your spouse. The way this works for a landlord is two fold. Number one, it offers more immediately accessible funds to cover defaults by a lessee, and number two, in case there is nothing left to collect from a buyer personally, then there is at least some additional amount to fall back on. This is especially true in recessionary markets, where many lessees have no equity left in their homes to be tapped by a landlord in cases of default.
Limit the Liability of the Personal Guaranty
Typically, the Guaranty will be for the entire outstanding balance of the remaining term of the lease, plus any fees and penalties. So an option during negotiation of a lease is to suggest a cap or limit to Guaranty exposure. Perhaps, the guaranty can be limited to 12 months worth of base rent payments. This works for a landlord if the lessee is operating a particularly strong concept that has a proven track, or with a franchise concept, where the Franchisor will step in to run the business in case of default, or find a suitable replacement franchisee to run the business.
For more information about how Just Elementary Inc. can help you with your Lease Negotiation Needs, contact our Client Care Manager, Sonia Chhabra, at (888) 926-9193 or by email firstname.lastname@example.org