What happens when you personally guarantee a lease?

The personal guarantee overrides any other conditions that are required with a lease or other agreement. It is the personal promise that the lease will be paid no matter what incident or even a occurs or arises. This means that the landlord is responsible for repaying any loan or other financial obligation. Before a bank will lend money to a new business, it usually requires additional collateral in case the loan cannot be repaid from the assets or cash flow of the business.

A personal guarantee requires the individual to repay the loan personally in case of default. The personal guarantee helps the lender because start-up businesses do not have a consistent track record of profits and cash to pay the bills. For example, when looking for a commercial space for rent in Austin Tx, most landlords will require that you personally guarantee the lease for the entire term. The absolute guarantee is the most basic type and is by default will set up the guarantor to cover all of the tenant's obligations, and potentially any renewals and modifications as well.

Today, having learned their lesson, retail landlords require shareholders or members of the tenant entity to sign a personal guarantee. Lenders almost always require personal guarantees and a full financial check of the business owner to ensure that the business owner has the finances to back up the guarantee. Investing time in negotiating a commercial lease that includes provisions that mitigate liability under any personal guarantee makes good sense for businesses, and for business owners. Across the country, from New York to California, nervous landlords are demanding personal financial guarantees from business owners, even if the business in question is incorporated as a limited liability company.

There was a time when entrepreneurs and small business owners could negotiate commercial leases without a personal guarantee. In a personal guarantee, the guarantor (usually the business owner) agrees to be responsible for rental payments owed by the business under the terms of a commercial lease if the business fails to pay rent or fails to pay rent after vacating the leased space before the end of the lease term. Typically, the landlord will require you to provide an advance or larger security deposit in lieu of a personal guarantee. Typically, a commercial lease will stipulate that if the tenant (the business) fails to pay the rent, the landlord can collect against the personal guarantor.

This means that even if the lender changes the terms of the loan, the personal guarantee still stands. The fact that landlords and lenders require guarantees does not mean that there is no room for negotiation. A small business owner can form an LLC or S-Corp for the business to protect himself or herself from personal liability for the acts of the business entity. Since the recession, many landlords want to keep as many personal guarantors as possible in the lease.

This amount is definitely subject to negotiation, and you may want to ask that CAM costs be waived, or that the amount of the guarantee be only for tenant improvements. If you are asked to sign a personal guarantee for a lease or loan, knowing what this guarantee entails and being able to negotiate the terms can help you minimise your personal financial exposure in this situation.

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