How can I negotiate or limit a personal guaranty on a retail commercial lease?

A personal guaranty is one of many terms to negotiate in a retail lease. A personal guaranty, though, is particularly important. Landlords will typically want this type of guaranty, and tenants will generally prefer not to give it. The reasons both sides have are valid, so it’s important to know how they can compromise.

A guarantor pledges personal wealth to back the tenant’s lease obligations. In most states, if the lease requires a guaranty, the guarantor could lose their house if the business fails. The guarantor obviously doesn’t want to pledge their house, so the tenant will often form a corporation or LLC/LLP and have that entity sign the lease instead. It isn’t perfect but it is an option.

Signing a lease in the name of a new corporation or LLC/LLP may be a good first step but it won’t take care of everything. Since those entities usually have no history the landlord may not be satisfied. They typically want a personal guaranty. The tenant will want it to fall away the longer they are successful. The landlord will want to collect rent first.

Guarantor Liability Should End

One method of balancing both sides’ concerns is to include language reducing the tenant’s personal guaranty. This would have it end after the tenant operates the business at the premises for a certain amount of time. It’s like a trial period, after which the tenant won’t be a guarantor anymore. It may depend on when the business should establish itself and how long that takes. If it takes three years and the lease is 10 years, the tenant may give their personal guaranty for just the first three years. But remember there is a catch. The guaranty may last longer than three years if there are certain events, which would be the tenant defaulting on a lease obligation before then. If that happens and you are in default, the release at the end of 36 months may be delayed or even canceled. That’s fair. A landlord should have this type of protection. If your business isn’t successful after 36 months, chances are it has closed long before then.

So what happens if you have a tenant who finds someone to buy their business and the lease hasn’t ended yet? The tenant may be able to assign their lease to the buyer. The tenant should want the guaranty to end if they sell the business and hand the lease to a new tenant. If your landlord doesn’t agree to you getting off the hook entirely when you sell your business, try a compromise where your guaranty stays in place for 12 to 24 months after the sale. Whether you get any of this depends on the buyer, not just on the fact there is one. In deciding if the new tenant can pay the rent, your landlord will ask what background they have running stores like this and what kind of financial strength they bring to the business. Any tenant should understand the landlord’s point of view.

Security Deposit

If the business is new and you don’t want to give a personal guaranty, the landlord might agree to accept a larger security deposit instead. The big drawback of a larger deposit is that it sits idle and usually earns no interest. That means it is out of your hands as working capital. But it may be more palatable to you than the dread of a personal guaranty. A landlord will probably not object to a larger deposit because they’re getting more ready cash in hand if you ever default. It is also a fallback for the landlord if, after you default during a recession, your house has no equity to collect.

Limiting It to the Base Rent for 12 Months

As long as you are a guarantor, you will typically be on hook for every cent of base rent and every fee/penalty owed. One way to reduce that is to limit it to the rent for a certain number of months. For example, if the landlord is asking for a guaranty equal to the full lease amount, you could propose limiting it to the base rent for 12 months. A landlord might be receptive to a proposal like this if you run a strong, proven concept or are a franchisee of a well-known company, especially if the franchisor may take over the business or find a replacement franchisee in case of a default.