Are personal guarantees normal for commercial lease?
For first-time entrepreneurs, a personal guarantee can be unavoidable. However, if your company has a proven repayment, adequate capital, and a strong balance sheet, you may be able to convince a landlord to waive the guarantee entirely. Business owners often need to provide a personal guarantee to get a business loan or rent commercial space for their business. Most management consultants say you should keep business and personal financial matters separate, and the loan is for the company rather than the individual. Why is this personal guarantee required?
Business landlords typically require a personal guarantee from directors because a commercial lease is extended. Your desire to protect yourself from a tenant’s bankruptcy is understandable, especially if repayments are made over a period of years, not months. Investing time negotiating a commercial lease that includes provisions that mitigate liability under a personal guarantee makes sense for companies and business owners. However, when it comes time to sign a commercial lease, it may be impossible to completely isolate the owner’s personal finances from business assets.
For a rental agreement, your landlord can request a personal guarantee for all costs for the rental period, including the cost of maintaining the common area (CAM) and tenant improvement costs (TI) (cost of improving rental space to your specifications). Landlords may be willing to negotiate rent and common area (CAM) maintenance fees, but one thing they’ll likely insist on is a personal guarantee. However, there are a few methods to negotiate these personal guarantees that can be applied to leasing transactions. If more than one person provides a personal guarantee on a commercial lease, guarantors may be able to reduce individual risk by agreeing to share ownership of the rent if the company does not pay the rent.
For example, a landlord may be asked to “mitigate their damage by renting the leased space to a new tenant as soon as possible. Just because landlords and lenders need guarantees doesn’t mean there’s no room for negotiation. Since the recession, many landlords want to keep as many personal guarantors as possible for the rental contract. In other words, if a company is not paying its rent under a commercial lease, the landlord wants someone from whom they can collect the rent from someone other than the business entity itself.
In some cases, the landlord requires a 2-3 month deposit if these essential items are not strong enough to provide the landlord with a level of comfort when renting out the space. It’s also important to find the right landlord and lease, and unfortunately, startup landlords may be a little more reluctant to rent out to companies with a low track record, or they may ask for additional clauses to ensure they get their rent. Another way to reduce risk for guarantors is to include the company’s right to assign their lease to a new tenant, so a new business tenant occupying the space is responsible for the rent if the business is sold or otherwise needs to be closed down. In a personal guarantee, the guarantor (usually the business owner) agrees to be responsible for the lease payments owed by the company under a commercial lease agreement if the company does not pay rent or does not pay rent after the leased space has been vacated before the end of the rental period Rent pays.
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