In times when the economy is down, it is no surprise that commercial tenant defaults increase. During those periods, it is also not surprising to see landlords become more firm about requiring personal guarantees of commercial leases. Typically, the individual signing a commercial lease is doing so on behalf of their capacity as an officer of an entity and has no personal legal obligation. If the entity goes out of business, or worse into bankruptcy, the landlord’s only remedy is to file against the failed entity (which likely won’t result in much recovery for the landlord). Enter the personal guarantee, which requires an individual be responsible from their personal assets (in addition to the entity’s assets).
In the current economic climate, unless a tenant is a major corporation with very stable financials, very few landlords will negotiate a lease without a personal guarantee. However, personal guarantees can be negotiated to provide terms reasonably acceptable to both landlords and tenants. The key is finding the middle ground that gives the landlord the reassurance it needs while allowing the tenant to feel comfortable as well.
The most common ways to modify a full personal guarantee are: (1) a cap on the total amount of liability for the guarantee; (2) a cap on the length of time for the guarantee; (3) a sliding scale where the amount of liability starts at the full liability of the lease and over time gets “reduced for good behavior”; or (4) a sharing of liability percentages between more than one person.
Or instead a landlord and tenant could agree on an alternative to a personal guarantee. Some examples are: (1) a letter of credit; (2) an increase above the standard pre-paid rent; (3) an increase above the standard security deposit; and (4) tenant’s contributions to improvements.
Again, the key to this negotiation is to align the landlord and the tenant at a place where both are comfortable with the level of liability they are entering into under the lease. Both parties should evaluate their opinions on this matter in consultation with experienced legal counsel to negotiate a mutually agreeable guaranty.
Wendy K. Lambie
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