Should you personally guarantee a lease?
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. If a company fails or is otherwise unable to pay its rent, the landlord can collect the rent that the company would otherwise have paid in accordance with the rental conditions from the guarantor. 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.
For first-time contractors, a personal guarantee can be unavoidable. However, if your company has a proven record of repayment, adequate capital, and a strong balance sheet, you may be able to convince a landlord to waive the guarantee entirely. 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. This is because many commercial leases — and especially for small businesses or businesses that are just starting out — require the business owner to provide a personal guarantee as the rental period. Typically, a landlord will ask you to offer a deposit or a larger deposit instead of a personal guarantee.
A personal guarantee puts the tenant’s own assets, such as real estate, savings or other valuables, at risk if their company is unable to pay rent or other lease obligations. If you’re new to owning a business or are desperate to get a lease, you may be overlooking the legality of the personal guarantee. However, if the personal guarantees are not released when the company is sold, these guarantors guarantee the financial obligations of the company’s buyer. If you signed a personal guarantee under the commercial lease, your options for an early exit are pretty limited.
For example, if you’re looking for retail space to rent in Austin, Tx, most landlords require you to personally guarantee the lease for the entire term. Landlords typically require their potential tenants to provide business financial information such as tax returns, income statements, balance sheets, and personal finances before entering into a formal lease. Most landlords are reluctant to rent out commercial space to startups because they have a high probability of going out of business, and when they do, they leave the landlord an empty space and loss of income. Across the county, from New York to California, ski rental companies demand personal financial guarantees from business owners, even if the company in question was organized as a limited company.
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.
