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Why Are Personal Guarantees Needed for a Commercial Lease

Posted on: July 30, 2018

Most commercial real estate landlords require the lessee to provide a personal guarantee as a way to secure themselves against the potential of a future default.

Although this is a common request, effort should be spent to negotiate any personal guarantee and other lease terms with the assistance of a Fort Lauderdale commercial real estate attorney.

This way, tenants can be sure they are entering a favorable contract and that there are no major issues that could make them liable for more than necessary in the future.

What is a personal guarantee?

A personal guarantee makes you personally liable for the costs associated with a default on your commercial lease. It will require you to pay for those costs out of pocket with your own assets. There will be a time and dollar amount limit on the term of the personal guarantee and other terms which can be negotiated.

Why do landlords want a personal guarantee?

Landlords request these because many businesses end up failing within 5 years or less. Because of the fact that many commercial leases are 3-5 years or longer and because of the large costs associated with finding a new tenant, landlords want the certainty that their tenants won’t default.

If a tenant does go out of business or defaults, they want financial reimbursement, and that’s where the personal guarantee ensures that any debts are paid. Aside from long established corporations with stable financials, most tenants will be required to sign a personal guarantee, but there is plenty of room for negotiation, like any term of a lease.

Negotiating a personal guarantee

Before signing any lease, make sure you fully read it and understand each of the terms and your obligation. You can negotiate with the landlord to limit your personal liability as a part of the personal guarantee.

Other potential things to include may be a term limit for the personal guarantee, for example if you sign a 5-year lease and prove yourself for the first 3 or 4 years, you may be able to request that it expires at that point. In other cases, you may be able to substitute a letter of credit for a personal guarantee which would then be used in the case that you default.

There are many other things to consider as you prepare to sign your next lease. Speak with a commercial real estate attorney in Fort Lauderdale at Schecter Law today with any questions by calling (954)-779-7009.