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What is a Personal Guarantee in a Commercial Lease Agreement?
Given the country’s ever-changing economic and commercial landscape, commercial landlords are starting to implement strengthened protections when entering into lease agreements. Business lawyers in Cleveland explain that one safeguard landlords are putting in place is personal guarantees to protect their investments from uncertainty.
A personal guarantee is a legally binding contract between a landlord and the tenant company’s business owner or director. The agreement states that the guarantor will be personally liable if the business fails to fulfill its obligations under the lease. If it defaults on rental payments or becomes insolvent, the guarantor would be responsible for paying the rent arrears.
Before signing a personal guarantee, it’s crucial to understand its implications. The financial consequences of this personal liability can be severe and far-reaching. If you cannot fulfill the rent obligation, you risk losing your property and could be forced to declare bankruptcy. Consult extensively with skilled lease agreement attorneys in Cleveland.
When Can a Commercial Landlord Request a Personal Guarantee?
A landlord may request a personal guarantee if the tenant is a new business or has a record of not meeting their rental obligations. Typically, the need for the agreement arises when a party to a lease agreement doubts whether the tenants can fulfill their responsibilities under the contract. Essentially, the personal guarantor co-signs a loan for the tenant company.
Liability Attached to a Personal Guarantee
When you personally guarantee a company’s performance contract, you assume responsibility for the legal consequences of breaching the contract. For example, if the tenant company cannot pay its rent, you will be responsible for making the payments. The landlord can sue the business and you for unpaid rent.
Cleveland lease agreement lawyers explain that the landlord can pursue the tenant’s assets and come after yours if the tenant’s assets are insufficient to satisfy the arrears. Your home, investments, wages, and bank account balances may be at risk.
Does a Landlord Have to Go After the Company First?
Unfortunately, many people get into personal guarantee agreements, thinking the landlord will go for the company first. If a lease contract is breached, the landlord can sue the personal guarantor immediately, even without exhausting all other remedies against the company.
Typically, if a company is small and has assets of little value that may not be enough to cover the rent obligation, the landlord probably won’t even try to collect from the business. Cleveland business attorneys say the landlord may come after you because it is easier to collect against an individual than against a small company.
Can a Business End Its Lease Early?
If a business is struggling and can no longer keep up with its rent obligations, consider ending the lease early. However, the outcome would depend on the terms of the contract to evaluate the possible owners.
Working closely with experienced lease agreement lawyers in Cleveland when drafting lease contracts is always advisable. They can advise you to incorporate the following clauses to help you terminate the lease contract early:
- Break clause: Before signing the contract, you and the landlord must agree on a break clause. This clause means you can terminate the lease at a stated time, for example, at the end of the second year in a five-year lease period. However, you must notify the landlord, who has the right to refuse an early exit if the business has missed a payment.
- Surrender: You can negotiate your business’s exit terms by offering the landlord a deal. However, the process can be costly, and there are no guarantees that the landlord will accept it.
- Sublet: If the agreement allows, you can sublet the property to another business. However, your company will still be liable to the landlord. The payments from the new tenant can make the situation financially viable.
- Assign the lease: The arrangement involves getting a new tenant to take over the lease. The landlord may impose restrictions to ensure the new tenant’s suitability. You also retain some liabilities to the landlord and may need to guarantee the new tenant’s rental payments.
Without these provisions, your business will likely be locked into the contract for the full term. With a personal guarantee in place, the situation can become more complex. Consult knowledgeable Cleveland business attorneys to help you explore your legal options.
How Can I Avoid a Personal Guarantee for My Business?
Unless your business is well established and has a good reputation, avoiding a personal guarantee may be difficult. If you can convince the landlord that your company is financially stable and able to meet its obligations, they may agree to remove the personal guarantee requirement. You could also request that the guarantee expire after the first or second year of the contract.
After signing it, getting out of a personal guarantee may be difficult. A landlord who has the option to collect from two or three personal guarantors if the business breaches the contract may not be willing to give up that security. Skilled business lawyers in Cleveland can help you review the terms after a few years of the business meeting its obligations.
A Skilled Lease Agreement Attorney Providing Insights into the Role of a Personal Guarantee
Before signing a personal guarantee in a commercial lease agreement, it’s prudent to evaluate the risks. If your finances are insufficient to bail out the company in case of a breach, you may want to avoid undertaking that risk. You don’t want to lose your personal assets to fulfill the business’s rental obligations.
Arriving at a sound decision may call for the expert opinion of experienced lease agreement lawyers in Cleveland. The Watson Kuhlman, LLC legal team can evaluate your business in-depth and provide legal counsel that best suits your situation. Call us at 216-208-7858 for a FREE consultation.
