Suddenly seeing a personal guarantee in your lease can be one of the most unwelcome surprises in commercial real estate.
Commercial landlords will sometimes have a habit of making no mention of a personal guarantee in early conversations, until they present the lease and there is suddenly 3 pages of verbiage to protect themselves with a personal guarantee.
It can be jarring to see them asking for so much personal information about you to protect their interests, just in case you happen to default on the lease. They may even ask for information on your spouse.
We have worked with clients who have been completely blindsided by the repercussions of a personal guarantee in a commercial lease and found themselves responsible for literally millions of dollars in rent for a space they no longer inhabit.
How can you avoid this?
1. Don’t Sign it
Your would-be landlord may be presenting a personal guarantee as an absolute deal-breaker to them. They may claim that they need to protect themselves in case of a default, particularly if you’re a young and unproven company.
None of these things are relevant and you do not have to sign this. The odds are very good that this isn’t as big of a steadfast deal breaker as they are presenting it as, and you can do other things to help protect their interests.
2. Negotiate Alternate Terms
Instead of signing, open the doors to renegotiation. Or bring in a trained professional looking to negotiate on your behalf if this isn’t your area of expertise.
There is a lot you can do in this situation. You can discuss increasing the deposit, or reducing how much tenant improvement allowance you are looking for, or you can try removing any free months of rent that were discussed.
3. Renegotiate the Guarantee
Even if your potential landlord will not accept any of the above terms in lieu of a personal guarantee, that doesn’t mean you have to sign on to be personally responsible for the entire amount over the entire life of the lease.
You can limit the amount of exposure. For example, you can look to be responsible for 6 to 12 months worth of rent, instead of the entire amount remaining following a default.
You will also want to have an expiry on the guarantee. This does not have to be something that survives the entire length of the lease. Try to negotiate to have it null and void and of no further effect after the first year of your lease.
We highly recommend that you avoid negotiating these terms by yourself, unless you have extensive experience with commercial leases. If you’re not an expert in this area, you may feel like you’re not in a position to negotiate, or push back on potentially massive items in your lease.
Your would-be landlord may also get the impression that you’re new to this. They may try to work some unfavorable (or even unfair) terms into this lease. Don’t be bullied or taken advantage of! Know your rights, or work with someone who can fight for them on your behalf.