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Commercial Leases: Negotiating Personal Guarantees
By July 16, 2014 Posted in Landlord/Tenant Law Share
Given the change in the economy over the past several years, some landlords have seen more lease defaults than ever before. That being the case, many landlords who deal with commercial properties have sought to obtain personal guarantees from potential tenants. But what is a personal guarantee on a commercial lease? Simply put, a personal guarantee means that the business owners or individuals who are acting as guarantors will be responsible for making the lease payments should something go wrong with the business itself. Even if a business is an LLC or a corporation, a landlord might refuse to rent the sought-after space without a personal guarantee. Both landlords and tenants should note, however, that there are ways in which to customize personal guarantees in order to make certain that the terms are fair and reasonable for both parties.
The Negotiations
Generally speaking, when an individual (usually an officer) signs a commercial lease that does not contain personal guarantee provisions on behalf of a corporation, he or she will not be legally responsible for the debt if the corporation fails or closes suddenly. Accordingly, the landlord's only remedy would be against the unsuccessful business. However, in order to avoid such situations, landlords may choose to ask for personal guarantees.
From a legal standpoint, one crucial thing that both New Jersey landlords and tenants should keep in mind is that all the terms of any personal guarantees that are attached to commercial leases must be put in writing. Proposed provisions of the guarantee or certain modifications that have been negotiated as part of the guarantee must be documented in order to be enforceable and legally binding.
Some landlords might choose to accept what is commonly referred to as a "good guy" guarantee, which will make the individual guarantor only liable until the tenant leaves the property, even in cases where the tenant leaves prior to the expiration of the lease. In such cases, the landlord might choose not to enforce the personal guarantee if the rent has been kept up-to-date and the business shuts down. The business, however, might still be held legally responsible for the rest of the lease term.
Additionally, some landlords who seek to include personal guarantee provisions in their commercial leases might also wish to perform financial background checks on the officers who are making the guarantee in order to ensure that those individuals signing the lease indeed have the ability to make the payments in the event the guarantee needs to be enforced.
From the tenant's standpoint, the business might be able to bargain for terms that will limit the impact of the personal guarantee overall by asking for the guarantee to be limited to a certain length of time. For example, if the tenant signs a 15-year lease, the landlord might choose to apply the terms of a personal guarantee only to the first five years of the lease, but only if the tenant has established a good history of making timely rent payments and shown that the business is stable.
Commercial lease negotiations typically involve a variety of terms and customizable options. That is why it is important for those who are seeking to negotiate commercial lease terms to work with skilled attorneys who are familiar with the law. Contact an attorney at Griffin Alexander, PC today to discuss the details of your lease.