What does it mean to personally guarantee a lease?
This means that if the business falls into difficult months or is ultimately unsuccessful, the landlord can sue you for unpaid rent from the commercial lease. Before a bank lends money to a startup, they often need additional guarantees in case the loan cannot be repaid from the company’s assets or cash flow. A personal guarantee requires that the person personally repays a loan in the event of default. The personal guarantee helps the lender because startup companies don’t have a consistent history of profits and cash to pay bills.
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. In a commercial lease, if more than one person provides a personal guarantee, guarantors may be able to reduce individual risk by agreeing to share ownership of the rent if the company does not pay the rent. 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 is paying. 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.
If another tenant occupies the room during the rental period, the personal guarantor is only on the hook if the rent of the new tenant is below the amount secured by the 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. However, if the personal guarantees are not released when the company is sold, these guarantors guarantee the financial obligations of the company’s buyer. The Good Guy Guarantee is a limited personal guarantee where the guarantor charges in full for the tenant’s payment of rent and possibly other rental obligations.
If you are asked to sign a personal guarantee for a business lease or loan, you can minimize your personal financial commitment in this situation if you know what comes with that guarantee and if you can negotiate terms. 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). Investing time negotiating a commercial lease that includes provisions that mitigate liability under a personal guarantee makes sense for companies and business owners. There was a time when entrepreneurs and small business owners could negotiate commercial leases without a personal guarantee.
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. Business owners often need to provide a personal guarantee to get a business loan or rent commercial space for their business.