A personal guarantee is a commitment by a guarantor to personally pay back the commercial lease obligation if their business goes under. A personal guarantee is an unsecured guarantee with no specific piece of property to be used as recourse. Therefore having one in your commercial lease contract, you are putting your own personal property at risk.
Personal guarantees are a very common request in commercial leases, especially for start-ups. Most landlords will require new businesses with no track record to sign one. Without agreeing to a personal guarantee, newer tenants will find it very difficult to lease commercial space. Alternatively, an existing company with solid credit and good business financials likely won’t be required to sign a personal guarantee.
Two of the main reasons why a landlord may require a personal guarantee are:
- The landlord could lease the space to anyone. By leasing to a new business, they are taking on more risk than if they were to lease the space to an established company. If your business fails, the landlord would lose money that they could have made by leasing to a different group.
- If a space needs a lot of improvements that the landlord will be funding, they are essentially making an investment in your business by making these upgrades. A personal guarantee allows the landlord to protect their investment if your business fails.
Personal Guarantee Negotiation Tactics
When negotiating a personal guarantee there are a number of things to consider. It is important to read the commercial lease contract very carefully. Try to limit the guarantee to only the landlord’s out of pocket costs. Some landlords may ask for coverage on the total lease rental value in addition to costs for tenant improvements. The personal guarantee coverage amount is often negotiable. It is best to ask for a time limit or burn off clause on the guarantee. If your lease is for five years, try to get the personal guarantee to expire after 36 months. Since most new businesses fail within the first two years, it is reasonable to request the personal guarantee expires after the initial 24 to 36 months of the lease term (assuming all your other payments are up to date).
Depending on how the landlord’s lease contract reads, you may want to propose to personally guarantee the rent for a set period of time if an early termination occurs. In the event that you need to terminate your lease with several years remaining, the landlord is likely going to try to keep you on the hook for the remaining payments. At the very least, they are going to want you to pay the rent until a new tenant is found. By offering to pay 6 to 12 months in the event of an early termination when negotiating the personal guarantee, you may save your self additional legal costs and rent payments in the future.
As an alternative, you may also offer to just pay 6-12 months of rent in advance or guarantee that same amount if you default. You should ask that the guarantee is waived upon a transfer of the lease. In the event that you sell your business or the lease gets assigned to a new entity, you don’t want to be stuck with the personal guarantee.
In general, remember the following things when considering a personal guarantee:
- Limit the guarantee
- Ask for a time limit
- Guarantee rent for a set period after an early termination
- Offer to pay rent in advance
- Ask for your guarantee to be waived upon transfer of the lease