A Personal Guarantee is a way for a landlord to make sure you can’t get out of making your monthly payments for a commercial space. As we explained here, you should always sign a commercial lease on behalf of your LLC, not as an individual. However, when you do that, your future landlord will most likely attach a personal guarantee to the end of your lease. This is a multipage document requiring you, as an individual, to guarantee monthly payments of the lease. The personal guarantee can prevent you from filing corporate bankruptcy if your business starts to go downhill. So, some might ask, why make sure a big deal about signing the lease on behalf of the LLC? If you are personally guaranteeing the lease anyway, what’s the difference? The difference is that you can negotiate liability under a personal guarantee easier than a lease. Here are four ways to do it:
4 Ways To Negotiate a Personal Guarantee
Reduce The Guarantee Time:
If left unchecked, a personal guarantee is going to cover the term of the lease. If your lease is a five (5) year lease, then you will be guaranteeing the lease for five (5) years. Therefore, the first negotiating opportunity is reducing the guarantee time. You may ask the landlord to limit your personal guarantee to only two (2) or three (3) years. A multiyear good payment history should help a landlord feel comfortable about ending the personal guarantee. You may ask for language like, ”At the end of two (2) years, if the tenant has not missed or delayed any payments, then the personal guarantee will terminate.”
Limit the Monetary Amount:
If you pay $2,000.00 a month in rent, then your personal guarantee will be for $2,000.00 per month. However, there are multiple elements that contribute to the total monthly rent payment. You will see base rent, CAM fees, utilities, insurance, property taxes (triple net), and possibly more. As such, you may negotiate a limit on the amount you will pay if the personal guarantee kicks in. Instead of paying the full monthly rent payment, your obligation would be limited to the base rent amount.
Do you have more than one owner in your LLC? Do you have partners? If so, then each of you owns a percentage of the company. If there are three partners, may each of you owns 33%. When partners are involved, landlords like to require all partners to sign the personal guarantee and use legal language called joint and several liability. That means each partner is guaranteeing the entire lease agreement whether the other partners pull their weight or not. Before you sign the personal guarantee, you may want to ask the landlord to limit the personal guarantee obligation of each partner to the percent interest ownership in the company. If your interest is 33%, then you are only guaranteeing 33% of the lease obligation.
Protect Your Assets with Limits:
The main concern about the personal guarantee is that it requires you to expose your personal assets. The LLC protects a creditor from coming after your home. But, the personal guarantee is exposing it again. Therefore, one final tip for negotiating personal guarantees is for you to limit the assets exposed. You can ask to carve out things like your house and personal bank accounts.
There is not way to force a landlord to eliminate a personal guarantee. However, these are four ways we try to limit your personal exposure when signing one.