News

WHY YOU SHOULD LIMIT THE PERSONAL GUARANTY FOR YOUR LEASE

         In most commercial leases, whether it is an office lease, warehouse lease, or retail lease, the landlord asks for a personal guaranty. To personally guaranty a lease means that you, the owner of the tenant entity, agree to use your own personal assets to cover unpaid rent and other costs if your entity fails to pay.

         Before you agree to personally guaranty a lease, you should negotiate with the landlord for a guaranty limitation. Why is this important?  Your personal assets are at stake.

         A guaranty with no limitation means that the personal guarantor has agreed to cover unpaid rent and other tenant obligations for the full initial term of the lease and for any renewal terms. A guaranty limitation means that you will personally guaranty the lease for less than that. The less time that your personal assets are subject to a personal guaranty, the better.

                The following is a common guaranty limitation for a 10-year commercial retail lease with two five-year renewal options:   the Guaranty ends after the first five years of the initial lease term, provided there are no defaults by the tenant extending beyond any cure period during those first five years. (Note that if there is a default beyond any applicable notice and cure period in the first five years, then the personal guaranty obligations will continue for the entire 10-year initial term).

         Sometimes, a landlord will insist on adding a rolling rent amount after the guaranty period ends. For example, your guaranty limitation may state that you personally guaranty the lease for the first five years, and then “12 months rolling”.  That means that after your first five years of guarantor responsibility is over, you are still on the hook as a personal guarantor for 12 full months of rent until the current term of the lease is over.  In other words, if your entity defaults under the Lease, the most that you, the personal guarantor, would owe the landlord after the first five years, is 12 full months of rent.  Once the Landlord receives 12 months of rent, they cannot pursue you as a personal guarantor to pay any more.

         Keep in mind that landlords try to add obligations to the rolling 12 months of rent. You probably agreed to a simple statement of “12 months rolling” in the letter of intent.  Landlords often try to interpret “12 months rolling” to mean that you are responsible as a personal guarantor for all rent due up until the time the Tenant vacates the premises, plus 12 months of rent.  The amount of time before Tenant has vacated the Premises can add up to equal a lengthy number of months or years.  The result is that while you initially believed that as a guarantor you would only be liable for one year’s rent, you are responsible for a much larger amount than 12 months’ worth of rent.  The added amount really can change the deal for you.

         Next, please note that accelerated rent language in the default section of your lease can increase what you may be asked to pay as a personal guarantor after an event of default under the lease. An accelerated rent clause requires a tenant to pay up front a lump sum of rent due for the rest of the current term. Because the tenant entity likely has no assets at that point, that lump sum of accelerated rent becomes the responsibility of the personal guarantor. If the personal guarantor does not have this sum in liquid assets, the guarantor may have to sell their home or other personal assets to pay this amount.

Furthermore, it is typical and reasonable for landlords to require guarantors to reimburse the landlord for attorneys’ fees, court costs, and collection costs. Although personal guarantors are expected to keep themselves educated as to what is going on with the tenant entity and step in immediately and pay if the tenant entity fails to pay, there are many times that personal guarantors fail to step in as promised. Then, the landlord must go to collections to pursue the personal guarantors to pay what is owed. 

         Your best bet to get a good limitation on your personal guaranty is to hire a real estate attorney that has experience negotiating leases with commercial landlords and understands personal guaranties and limitations.  Give Holden Law a call today at 856-242-1808 or email us at yvonne@holdenlaw.us to discuss your lease and personal guaranty.

This website is for informational purposes only and does not provide legal advice. Please do not act or refrain from acting based on anything you read on this site. Using this site or communicating with Holden Law through this site does not form an attorney/client relationship. This site is legal advertising.