Proceed With Caution - The 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 may ask for personal guarantees and a complete financial check on the business owner to ensure the owner has the finances to guarantee the lease. A personal guarantee means that even though your company is the tenant, you are essentially a “guarantor” for your own company. In other words, you’re promising to personally take on financial responsibilities for the space if the company ends up falling short. If you must agree to a personal guarantee, there are some essential things to consider
You may wish to try and limit the amount of the guarantee to a one, two, or three-year guarantee and up to six months rent if in default. The landlord may refuse this, but its certainly worth a try.
Request 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 two or three years. You could also ask for a review of the personal guarantee after a year or two, to look at your business profits and cash flow and credit rating. If by this point the business is showing a nice profit, you may be able to get the personal guarantee removed.
Put down a hefty security deposit, set up in an escrow account, that the landlord can use to receive your lease payments if you can’t make them for a certain number of months.
We often find ourselves negotiating on this point on behalf of our clients. We highly suggest that tenants be prepared to offer a further financial security deposit in an attempt to avoid a personal guarantee. Even with best efforts, a personal guarantee if often required and so we always emphasize the importance of clients letting us know immediately when their business starts underperforming and causing concern. CHI Real Estate Group has a network of buyers and investors in commercial real estate we can discreetly contact that may be ready to jump in and help you avoid the worst case scenario of being in default or locked out.
Call your friends at CHI Real Estate Group today on 647.347.9723 – we are here to help!