Personal Guarantees can apply to almost any long term installment-type legal contract. In this article, we are going to focus on the most common kind of personal guarantee we see; those contained in commercial lease agreements.
What is a Personal Guarantee?
In it’s most basic form, a personal guarantee is a document requiring an individual to guarantee the payment requirements in the contract. In commercial leases, an individual is “personally guaranteeing” that the landlord will receive the monthly lease payment. Without a personal guarantee, a failing business may be able to get out from under a lease. For example, the business could file bankruptcy or just stop paying. That creates a big issue for the landlord. Therefore, landlords require personal guarantees to minimize risk. This is especially true when renting to new businesses.
You Should Expect One
Whenever we review a commercial lease, the first item we look at is the name of the parties to the lease. We want to see the landlord’s LLC or corporation and the gym owner’s LLC or corporation. When the proper parties are named in the lease, we know we will see a personal guarantee attached to the end. Because we expect you, you should as well. Anyone can sign a personal guarantee. It could be the gym owner, a partner, or a third party providing the start up money, for example.
They Are Negotiable
Some argue that requiring gym owners to have their LLC named in the commercial lease instead of the gym owner personally is a waste of time. This is because of the personal guarantee. However, regardless of the negotiations, the named party in the lease will always be responsible for payment of the lease. The personal guarantee, however, provides an opportunity to negotiate an end to personal liability during the term of the lease. For example, while the term of the lease may be for 5 years, and landlord may agree to terminate the personal guarantee after 2 years of consistent payments. That is just one way an individual can remove personal liability under a commercial lease.
In the end, when you are negotiating a commercial lease, expect a personal guarantee. You want the lease in the name of your LLC. The terms of the personal guarantee are negotiable. If you want help, reach out. That’s what we do.