A primary reason we set up corporations and limited liability companies is to legally protect our non-business assets from business creditors. However, for smaller businesses one of the largest liabilities may be a business tenant’s lease obligation. Many landlords expect a personal guarantee. This is especially true with newer companies which may have little or no credit history.
What can you do when the landlord wants a personal guarantee? Think about the landlord’s real concerns and find ways to more precisely address those concerns by something less than a blanket personal guarantee for the entire term of the lease. Ideas for discussion with the landlord include:
- Limit the guarantee to a maximum dollar amount, such as an amount equal to an agreed number of months’ rent.
- Limit the guarantee to a maximum period of time if conditions are met. For example, the guarantee is eliminated or reduced after a specified number of years of meeting specific credit requirements and no default or late payment.
- Reduce the guarantee after the agent’s commission and tenant improvements are paid back to the landlord, or guarantee only the commission and tenant improvements and possibly some portion of the rent.
- Exempt specified assets from the personal guarantee, such as the family home or another business, etc. Or, the reverse: specify assets or their replacements which are subject to the personal guarantee, but not others.
- Exempt from default or guarantee a loss due to certain tragedies such as death or disability of the business owner or a major partner.
- If there are multiple owners, requiring all owners to give a personal guarantee may be overkill.
- If one of several owners leaves the company, don’t forget to have provisions for removal of the departing owner’s guarantee.
In conclusion, try to resolve the landlord’s concerns by some means other than a personal guarantee of the entire obligation and/or term. All of the above techniques have been tried and sometimes with success. These same principles can be used with any creditor demanding a personal guarantee (lender, supplier, etc.). Use your imagination, and use a good agent and legal counsel when appropriate.
This information is general in nature and should not be relied upon for your specific circumstances. For information, questions, or comments, please contact Douglas J. Engel or Kathryn S. Kumar.