Your Guide to Commercial Lease Personal Guarantees
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.” The personal guarantee allows a landlord to use your personal assets to cover costs if you fail to pay rent, maintenance fees, or other related expenses.
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. However, once you build out a space to fit your needs, finding a business needing a similar setup might be challenging. So if you can’t pay, the building owner may be left scrambling to find a new tenant.
Can I get out of a personal guarantee?
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.
There are so many variables here, so we strongly recommend hiring a lawyer who understands local laws and your specific situation if this occurs.
How to negotiate a guarantee
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 or duration.
To learn more about how location management software helps franchisees get organized and prepare for due diligence, visit Leasecake.com.
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