Commercial lease tenants are often asked to sign a personal guaranty as part of their lease agreements. Should these tenants agree to sign a personal guaranty? What is it, and when does it make sense for tenants to sign it?
What Is a Personal Guaranty?
In commercial lease agreements the landlord sometimes requests the tenant to sign a personal guaranty. This is essentially an agreement by an individual or individuals of the company to take personal responsibility for payment of rent under the lease. Commercial lease agreements are generally executed under a company’s legal entity – the LLC, PLLC, Inc, etc they have registered to conduct business. If an individual agrees to sign a personal guaranty they will be responsible for performance of all obligations under the lease.
Your lender could request a personal guaranty to loan business funds as well. It’s important to understand what you are signing and taking responsibility for. Seeking advice from your attorney is also a good idea prior to signing a personal guaranty.
When Should Tenants Sign a Personal Guaranty?
Signing a personal guaranty makes sense under certain circumstances. Start-ups or new franchisees may be asked to sign a personal guaranty. Businesses with low revenue or profits may need to sign one as well. Businesses with high debt to equity ratios are considered a higher risk, especially if other financial indicators aren’t strong. If your business financials are weaker now than in previous years the landlord may request a personal guaranty. Even companies that have been operating for a few years may be asked to sign a personal guaranty if the landlord is going to be sinking a lot of capital into the deal. So, when does it not make sense for commercial lease tenants to sign a personal guaranty?
Reasons a Tenant Should Not Agree to Sign a Personal Guaranty
The personal guaranty is a negotiable item during a lease transaction. The tenant should not simply agree to sign one in all cases. The landlord’s preference is obviously to have a personal guaranty on the lease. In the event the company is unable to pay the rent the landlord may be able to go after the individual to seek repayment of rent owed. Here are some occasions when tenants should be able to avoid signing a personal guaranty:
- When signing a short term lease (12 – 18 months) in length
- If the landlord is not spending much (or any) capital in tenant improvements, brokerage commissions, etc. to get the deal done
- When the business has strong financials and/or has been operating for a number of years.
To summarize – a personal guaranty is valuable to potential commercial landlords. They have a strong preference to have one signed when possible. This does not mean you should always sign one. Be aware of the economic deal points, the strength of your commercial real estate market, and how your company’s financials stack up against typical deals in your market. Ask your commercial tenant rep broker for advice, and also consult your attorney before deciding to execute a personal guaranty for your next commercial lease.