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Why Do I Need a Personal Guarantee for a Commercial Lease?

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Question: Why Do I Need a Personal Guarantee for a Commercial Lease?
Answer:

When I talk to people who are getting ready to buy or start a business, they often tell me that they are being required to give a personal guarantee in order to lease commercial space for their business. (A personal guarantee requires the individual to pay back a loan (usually a business loan) in the event of default.) In the past, this requirement for a personal guarantee on a lease was not common. I suspect it has something to do with the economy, but I was curious. I asked Susan Dawson, an experienced leasing attorney, for her comments:

There was a time when landlords were willing to negotiate leases without personal guarantees. With the commercial real estate industry collapse, those days are long gone. Landlords may be more willing to negotiate on rents and common area maintenance (CAM) charges, but one thing they will insist on is a personal guarantee.

When a business enters into a lease, usually the lease is signed by any officer on behalf of the corporation. If the business fails and defaults on the lease, the landlord is out of luck. Which is why landlords now require personal guarantees and a complete financial check on the business owner to ensure the owner has the finances to back up the guarantee.

Negotiating a Personal Guarantee on a Commercial Loan

Just because landlords require guarantees does not mean there isn't some room for negotiation. You may want to consider one of these options:

  • Ask for a time limit on the guarantee. Sometimes landlords simply want you to establish a track record. So if you're signing a five year lease, you can ask that the guarantee only lasts for the first three years.
  • If you have the financial resources, you can also offer to put a letter of credit in place for a set dollar amount, and the letter can be tapped if the property is abandoned.
  • You could offer to guarantee rent for a set period of time after early termination. If a tenant breaches a lease with three years remaining, the landlord has to try to re-lease the space. Courts usually will not award the landlord the right to recover all three remaining years worth of rent. The court may try to determine how many months the landlord would need under the current leasing environment to re-let the space, and that's all they will award. So, by offering that deal up front, saying you'll agree to guarantee 6 or 12 months, basically cuts through all of the legal negotiations and wrangling at the end and sets out the deal between the parties up front.
  • There are other lease negotiation alternatives. A creative broker or lawyer should be able to help you with some other ideas.

Susan Dawson has devoted her career to representing businesses, business owners, and entrepreneurs. She concentrates her practice in the areas of Business/Corporate Law, Employment Law and Commercial Real Estate/Leasing. Waltz, Palmer & Dawson LLC (www.wpdlegal.com) was founded in 2008, creating one of the only entirely women owned law firms in the Chicagoland area.

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