Starting a new business is risky. And not just for the operator. Landlords are wary of renting to new business owners or those without established credit.
While reviewing your commercial lease, you might have noticed some language that raised a red flag — a “personal guarantee.”
What does a personal guarantee mean in a commercial lease, and how can it impact your business? Before you sign, make sure you know what you’re getting into.
A personal guarantee for a commercial lease allows a landlord to use your personal assets to cover costs if you fail to pay rent, maintenance fees, or other related costs.
In plain language, it means you are personally liable for rent if the business cannot pay. In addition, your savings and other personal assets may be seized to cover rental payments for the leased commercial property. In some states, your primary residence could even be at risk.
If you’re opening your first few commercial businesses, the shopping center landlord wants a guarantee you’ll pay, which is fair. Once you build out a space to fit your needs, finding another operation wanting a similar setup might be difficult. So if you can’t pay, the building owner may be left scrambling to find a new tenant.
Putting your personal assets in jeopardy might feel risky. Luckily, there are some nuances you might not be aware of — including how to get out of a personal guarantee.
In some situations, yes. New business owners or those without established business credit may require personal guarantees.
If you have 10 successful restaurants and established commercial credit, you likely won’t be asked for a guarantee. But landlords might require one to minimize risk if you are launching your first business or starting a restaurant when you’ve only owned sporting goods stores.
However, you may be able to negotiate to have the guarantee removed or adjusted to more favorable terms. We’ll cover negotiations below.
Yes! In many cases, you can get out of a personal guarantee after a specified time or negotiate to have it removed before renewing the lease. For example, in a five-year lease, you might ask to remove the guarantee after two years of on-time payments. You may also ask to remove it once you have enough business assets to offset the liability.
Many business owners don’t realize the issues a personal guarantee can cause, or they forget to request removal. That can cause significant problems. Even if you sell the business, you might be on the hook for the next owner’s failure to pay if you don’t remove the guarantee.
Please make sure that sinks in. If your personal guarantee is still attached to the lease for a business you no longer own, it’s possible you will be liable if the new business owner stops paying rent. There are so many variables here, so we strongly recommend hiring a lawyer who understands local laws and your specific situation if this occurs.
Every aspect of your commercial lease is open for negotiations — including the personal guarantee. So before you sign, discuss the guarantee and consider asking for adjustments. For example, can it be removed in exchange for a co-signer on the lease?
Here are a few other ways to reduce or eliminate a commercial lease personal guarantee:
• Set it to expire after 12 to 24 months, as long as you pay on time.
• Offer other business assets as the guarantee rather than personal assets.
• Request a review at 12 or 24 months. If you can show proof of consistent income, ask to have it removed.
• Offer a larger security deposit in exchange for removing the guarantee.
• Pre-pay rent for the first six months or year.
• Ask to adjust other terms of the guarantee, such as the amount, time period, or when it expires.
TL;DR: Commercial lease personal guarantees are common, especially for less established businesses. However, you don’t have to accept the first terms offered. Instead, consider asking for a cap or a review period to remove the personal guarantee after a year.
Managing commercial leases can be complicated. For example, did you remember to pay your property taxes on time? Is your guarantee about to expire? What about renewal dates, permits, and warranties?
Leasecake makes it simple with our all-in-one lease management platform. We track important dates, store crucial information, simplify compliance, and improve collaboration for your entire team. We’ll help you maintain visibility of critical clauses, due dates, and much more.
Schedule a demo and see how simple lease management can be.
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