When a tenant enters into a commercial real estate lease, there is often a request for the tenant to sign a personal guarantee. The Balance Small Business explains that, “Before a bank lends money to a startup business, they often require additional guarantees in case the loan can’t be paid off from the assets or cash flow of the business.”
This means that the tenant is personally responsible for paying the debt. The landlord or franchisor can hold the person, not just the business, accountable by accessing personal assets or bank account. Before signing a personal guarantee, which is required in order for the personal guarantee to be enforced, definitely consult an attorney focusing on commercial real estate. Although the following tips are helpful, setting up a meeting to discuss your options can prove to be extremely beneficial before signing a personal guarantee and entering a lease.
Tip #1: When negotiating a lease, try to suggest a larger security deposit or share the entity financials. This makes the entity responsible – not the tenant personally. It is suggested that a security deposit be made with a letter of credit. This is a transferable asset and has value. This helps to protect against bankruptcy, as the letter of credit becomes part of the bankruptcy estate.
Tip #2: Remove a spouse if there is one. Should a problem arise, the spouse’s assets will not be attached to the tenant’s if the spouse is not part of the business. The landlord or franchisor will only have access to the entity. This can only be done on a go-forward basis, however. Removing the spouse probably won’t have an effect on a personal guarantee that is already signed.
Tip #3: Limit the time period. The tenant can sign a personal guarantee and require that it expire at a certain date. Landlords can require that the personal guarantee last for a certain amount of time (sometimes referred to as a “burn-off period”), a time that shows that the business are profitable, reliable and trustworthy. The landlord may just want to see a proven track record of success. This is a place where working with an attorney really benefits the tenant. Personal guarantees are common in commercial real estate. While this may be a new concept for you, attorneys are used to negotiating these terms and keeping your finances as safe as possible.
Tip #4: Limit the personal guarantee. When a tenant – along with a commercial real estate attorney – negotiates the lease, an amount can be set on the personal guarantee. This sets the maximum dollar amount that the tenant is personally liable for. You can limit the dollar amount if you sign a limited personal guarantee. This is often used when multiple business partners are signing the guarantees.
Personal guarantees are just that – personal. When a tenant enters into a lease, the attorney should take every precaution to protect the tenant. A personal guarantee is often a document that is separate from your building lease. Regardless, a good commercial real estate lawyer can help you make sense of it and negotiate better terms. Understand the effect that a personal guarantee could have on your lease, and most importantly, your life. Want to discuss how this affects you? Set up a no-obligation consultation today!
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