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Why do I need to provide a personal guaranty for my commercial real estate lease?

By: Space Selectors   August 26, 2019

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When we talk to many potential customers who are getting ready to buy or start a business, they are often surprised to find out that they are being asked to provide a personal guaranty to lease commercial space for the business.  Since the loan is for the business, not for the individual, they wonder why a personal guaranty is needed?

 

What is a personal guaranty?

 

Most banks will require some guaranties before lending money to a startup in case the loan cannot be paid off from the assets or cash flow of the business they are lending to. A personal guaranty requires the individual to pay back a loan personally in the event of default. When looking to start a business you do not have a consistent history of profits and cash to pay bills, which increases the risk for lending. When providing a personal guaranty, you are putting your personal credit rating on the line as well as the credit rating of your business.

 

In the past, this requirement for a personal guaranty on a lease was not common, which is why many people do not expect to have to provide this. A commercial lease is a major commitment for a business, and typically the landlord wants to know that the lease will continue to be paid up to its completion, even if the company goes bankrupt. If the business fails and defaults on the lease, the landlord is out of luck. Which is why landlords now require personal guaranties and a complete financial check on the business owner to ensure the owner has the finances to back up the guaranty.

 

When it comes to a personal guaranty, we are seeing that they may be secured or unsecured. Security would be an asset, like a home, car or savings, that can be sold or used in order to pay the lease if need be. Most personal guaranties are unsecured, which means you will have to put a personal asset on the line. This means that you are putting that personal property at risk by signing the agreement.

 

Typically, a personal guaranty is a separate document within the lease itself. Since it is part of the lease contract, it will have to meet all the requirements to be valid and enforceable in a court.

 

Negotiating a Personal Guaranty on a Commercial Loan 

 

It might be possible to negotiate a personal guaranty. This is something that you must speak to your attorney or broker about to get proper guidance on. Because this is about security for the landlord, don’t expect concessions to be a given. Most landlord will not budge on a personal guaranty. However, just because landlords require guaranties doesn’t mean you can’t try to get better terms. Here are some ideas to speak with your broker about and perhaps try:

 

Limit the amount of the guaranty. When it comes to the amount your landlord wants, they may ask for a personal guaranty to cover all costs for the lease period, including common area maintenance costs and costs for tenant improvements. This amount is definitely up for negotiation. Based on a conversation between you and your broker on what is best, you might want to ask for the CAM costs to be taken out, or for the amount of the guaranty to be for only the tenant improvements. Trying to limit the personal guaranty to only the tenant improvement costs might be a good option as these costs are typically a big expense for the landlord that may not be applicable to the next tenant. If the personal guaranty is for TI, at least the landlord can recoup those expenses.

 

Ask for a time limit on the guaranty. Often, we see the personal guaranty as a way for the landlord to establish a track record. So maybe the guaranty only lasts for the first 2 years of a 5-year lease. Another option would be to ask for a review of the personal guaranty after a year or two. This way you can have the landlord look at your business profits and cash flow and credit rating. If by this point the business is showing a nice profit, you may be able to ask for the personal guaranty to be removed.

 

Put down a large security deposit, set up in an escrow account, that the landlord can use to receive your lease payments if you can’t make them for a certain number of months. If you have the financial resources, then it might be a good option to put a line of credit in place for a set amount.

 

Understand the law in your state. Just like other contracts, leases are subject to state laws and sometimes even local laws. Check the laws in that jurisdiction (ideally have an attorney do it) to make sure that your terms are reasonable and if there are laws relating to your personal guaranty.

 

There are other alternatives you can look into as far as limiting the personal guaranty. A creative broker or lawyer should be able to help you with some other ideas.

 

You might run into an issue if you do not have enough in personal assets or if you credit rating is lower. In this case, your broker should be able to talk to you about your options, but more than likely you will need a co-signer to provide the personal guaranty. This person will need to have the assets and credit to be able to do so on your behalf.

 

When the time comes, and you are asked to sign a personal guaranty for a business lease, having a broker or attorney who knows what is involved in the guaranty and is able to negotiate terms can help you minimize your personal financial exposure in this situation.

 

Are you ready to get started, but not sure where to start? Schedule a consultation today with one of our service representatives! We want to ensure that you are provided with the tools and support needed to handle any situation that may come your way while handling your commercial lease. Click here for more information!

 

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