Why most commercial tenants must sign a personal guaranty – Daily News

on Feb10
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In my 35 years of experience as a business owner and lease negotiator for corporate America and small business owners, the most common element for most small business owners when signing a lease is the personal guaranty vs. a corporate guaranty for large corporations.

I’m frequently asked by business owners if the personal guaranty can be omitted when signing a lease. Unfortunately, it is a requirement in all leasing transactions with small businesses.

There are a few exceptions when a commercial landlord will accept a letter of credit or other substantial collateral in lieu of the guaranty, but 99% of the time, a personal guaranty cannot be avoided.

There are many reasons for this requirement. First, the landlord wants assurances the lease obligations will be met by the business owner, and as an incentive, they want the lease backed by the personal guaranty, therefore, making it more difficult for the business owner to simply walk away from the lease if the business is not doing well or as well as expected.  The most common type of leases containing personal guarantees is a retail and professional service business such as medical/dental leases.

There are, however, some methods to negotiate these personal guarantees that can be employed in leasing transactions. The most recommended method is to use a limited or rolling guaranty. These methods are sometimes acceptable to landlords, depending on the business owners’ credit, financial picture and business experience.

The stronger the qualifications, the better odds of being able to negotiate. Keep in mind, especially when the landlord is spending substantial money on tenant improvements or providing a substantial tenant improvement allowance, which is in the tens of thousands or hundreds of thousands of dollars, they want protection for their investment when leasing their buildings or shopping centers to hedge their risk.

One of the more effective negotiating models is to ask that a rolling guaranty be effective after a negotiated amount of time has passed during the initial term of a lease, and provided the business owner has not defaulted and paid their rent timely.

The most common type of limited guaranty is the 12-month rolling guaranty. This means, after a certain amount of time has passed during the lease term, the business owners’ liability is limited to 12-months of rent payments vs. the entire amount of the lease obligation.

Depending on how long the lease terms are, I typically see 12-36 months after a lease term passes that a full lease liability can convert to the rolling guaranty. In other rare instances, the lease guaranty can burn off entirely without any continuing liability such as the rolling guaranty after a certain amount of time on a lease has passed.

The most important items to the landlord when leasing commercial space to a business owner are: credit, net worth, liquid assets and related business experience. The stronger these items are, the better your odds of negotiating the guaranty.

In some instances, the landlord will require 2-3 months security deposit if these important items are not strong enough to provide the landlord a comfort level when leasing the space. The increased security deposit is in addition to the personal guaranty.

It’s important for all small business owners to know that if they ever sell their business, their personal guaranty can continue in perpetuity unless negotiated at the time of sale. This basically means if the buyer of their business defaults on the lease, the landlord can come after you.

It’s also very important that a prospective buyer is well qualified, not only because the landlord has the right to approve the buyer known as a lease assignee, but also for the benefit of the seller of the business to ensure a lower likelihood of default and being obligated for the unpaid lease obligation if the buyer becomes insolvent.

In other words, the seller of a business has to think like a landlord in these cases.

Todd Dorn is president of The Lease Doctor and Dorn and company-commercial lease advisers. Reach Dorn at 888-413-7699 / 951-659-3163 or at tdorn@theleasedoctor.com.

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