Negotiating Personal Guarantees in Commercial Leases

Since the economic collapse a few years ago, there have been many significant changes in the business landscape. As tenant defaults have increased, landlords are frequently requiring personal guarantees of commercial leases. However, personal guarantees can be negotiated to provide terms reasonably acceptable to both landlords and tenants.

Generally, the individual who signs a commercial lease on behalf of a tenant does so in their capacity as an officer of that company. If the tenant goes out of business and the lease was not personally guaranteed, the landlord’s only recourse is to file a claim against the failed company. The officer who signed the lease has no legal obligation for the debt. Landlords may perform financial due diligence on the tenant’s officers and require the individual entering into the guarantee has the financial ability to fulfill the tenant’s obligations under the lease in the event tenant defaults. Landlord’s can also require annual updates to the officer’s financials and, if the officer’s financial health has declined, require tenant to replace the guarantor with another individual acceptable to landlord.

Unless you are a major corporation with extremely strong financials, a tenant may have a difficult time negotiating a lease that doesn’t include a personal guarantee; however, a tenant may be able to negotiate to limit the scope or impact of such guarantee. One potential option would be to include an expiration date of the guarantee in the event tenant meet certain milestones. The milestones can include things like establishing a history of timely rental payments and tenant’s financial stability, which over a period of time may give the landlord the confidence to release the guarantor from its guarantee. For example, on a seven-year lease term, the personal guarantee would only be in effect during the first three years if the tenant meets the milestones set forth in the guarantee.

Another possible limitation that could be included in the personal guarantee is what’s commonly referred to as the “good guy” guarantee. This type of guarantee protects landlords against tenants who vacate the premises early with no prior notice. The landlord agrees not to enforce the obligations of the tenant against the individual guarantor, even though the tenant has vacated the premises prior to the end of the term of the lease, but only if the tenant (a) provides the landlord with advance notice of its intent to vacate, (b) leaves the premises in good condition and (c) is current on rent up to the date of departure.

Another way to limit the guarantee is to cap the amount guaranteed by listing a fixed dollar amount. Alternatively, the cap could be set based upon a fixed number of months of rent. For example, in the event the tenant breaches under the lease and we assume the landlord should be able to find a replacement tenant in no more that five months, the guarantee could set a liability cap of five months of rent. Also, the tenant can request that the guarantee be waived upon transfer of ownership. So in the event the ownership of tenant is transferred to a new owner, the guarantee terminates.

Negotiating a commercial lease involves a wide array of terms and options. If you need assistance in negotiating your commercial lease, please contact the attorneys at Morsel Law