When a business signs a commercial lease, a landlord may require the business owner or another individual to provide a personal guarantee.
What Is a Personal Guarantee?
A personal guarantee is a contractual commitment in which an individual agrees to be personally responsible for certain obligations of a business if the business does not fulfill them.
In a commercial lease, this can mean that if the business fails to meet its lease obligations, the individual who signed the guarantee may be held personally responsible for obligations covered by the guarantee.
Depending on the terms of the agreement, those obligations may include unpaid rent and other lease-related costs.
Why Might a Landlord Require a Personal Guarantee?
Landlords may request personal guarantees when they have concerns about a business’s ability to meet its lease obligations.
Landlords may be more likely to request guarantees from:
- Startups and newly established businesses
- Small businesses with limited operating history
- Businesses with limited financial history or assets
- Companies whose financial strength may not provide sufficient security for the lease
A personal guarantee can provide the landlord with an additional source of security beyond the business entity itself.
What Does a Personal Guarantee Cover?
The scope of a personal guarantee depends on the specific language of the guarantee and the underlying lease.
Some guarantees may cover a broad range of lease obligations, while others may be limited by amount, time period, or specific circumstances.
Before signing, both the business and the individual providing the guarantee should understand exactly what obligations are covered and under what circumstances the guarantee can be enforced.
What Should Business Owners Consider?
A personal guarantee can have significant financial implications for the individual who signs it.
Business owners considering a commercial lease should review:
- What obligations are covered
- Whether the guarantee is limited or unlimited
- How long the guarantee remains in effect
- Whether there are conditions under which the guarantee can be reduced or released
- What happens if the business is sold or the lease is assigned
Because a personal guarantee is a legal commitment, business owners should consult qualified legal counsel about the specific terms before signing.
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Hayden Ingram works with businesses evaluating commercial leasing opportunities and helps clients understand the business terms involved in commercial real estate transactions.
Have questions about commercial real estate or commercial leasing? Contact Hayden to discuss your real estate needs.
