When you are signing a lease for an LLC, it feels like you should have protection against your personal assets. But some landlords ask for a commercial lease personal guarantee, which can result in exposure to you outside of the LLC. This guarantee means that if the company defaults on the payments, then it could turn from a business debt into a personal one, which puts your personal assets at risk.
So, before you sign on the bottom line, it’s critical that you know exactly what you are agreeing to with that signature. Read through the details of the contract and don’t hesitate to negotiate the terms in order to limit your exposure.
What a Personal Guarantee Actually Means
Just because you have an LLC, it doesn’t necessarily provide the protection that most people assume they have. If you agree to anything that involves a personal guarantee, then it means that you are personally liable for the lease (regardless of the entity structure).
The most common scenario when a landlord might ask for a personal guarantee is if a new or small business is leasing the space and the company doesn’t have a strong enough credit history to stand on its own. So, the landlord might request that the business owner provide a personal guarantee since there isn’t enough business credit history to rely on.
Always Know What You’re Actually Agreeing To Before Signing
What is a personal guarantee in a commercial lease? It’s critical that you know exactly what you are getting into if you decide to sign this agreement. There are different types of guarantees:
Full Guarantee: When there is a full guarantee (also known as an absolute guarantee), it makes you liable to pay the remaining lease term. Even if the business goes under, you still need to continue the payments until the end of the lease. You are held liable for everything, and there is no cap or expiration on the liability.
Limited Guarantee: A limited guarantee (also known as a capped guarantee) works a little differently. In this situation, your exposure is capped at a specific time period or dollar amount.
“Good Guy” Guarantee: This type of guarantee is designed to be the most tenant-friendly. It means that you are released from the terms of the agreement once you have vacated the space and left it in good condition.
Burn-Off Guarantee: Finally, a burn-off agreement means that your liability is reduced over time. It is usually tied to a track record of on-time payments.
As you can see, there can be a big difference between a full vs. limited guarantee. So, always have full clarity about what you are agreeing to before signing the lease agreement. If you have questions or need clarification about the terms of the agreement, then talk to a commercial lease guarantee attorney for personalized recommendations.
Common Mistakes Tenants Make When Signing Commercial Leases
Signing a lease should be a straightforward process, but there are a few common mistakes that business-owner tenants make when they don’t understand the differences between a business and a personal lease. A commercial lease guarantee attorney can help you avoid some of these common issues:
Mistake #1 – Assuming the LLC Protects Personal Assets: When a personal guarantee is involved, it’s a mistake to assume that your personal assets are protected because you have an LLC. This is one of the costliest mistakes that you can make.
Mistake #2 – Signing Without Reading Every Detail: Don’t sign on the bottom line until you’ve read the entire contract and understand what it actually means. Look at the default and cure provisions specifically,
Mistake #3 – No Cap Clause: If there isn’t a cap or burn-off clause written into the contract, then negotiate the terms of the agreement to include this clause. As part of the negotiations, ask for a guaranteed reduction with an on-time payment history, and make sure that the guarantee is limited to only the base rent (not CAM charges, taxes, and penalties).
By avoiding these mistakes, you can avoid exposing your personal assets. A proactive approach to managing the contract can save you a lot of money and problems in the future.
What Happens If You Default While a Personal Guarantee Is in Place
Ideally, you were proactive in negotiating the personal guarantee with the landlord in the beginning to limit your exposure. But keep in mind that if your business defaults on a commercial lease and a personal guarantee was part of the agreement, then it means that the landlord can pursue your personal assets. For example, they can come after your bank accounts, property, and any other personal holdings.
Even if you file for bankruptcy, it doesn’t automatically eliminate the personal guarantee. So, it’s best to always talk to an attorney when negotiating the terms of the agreement so they can show you how to limit personal guarantee liability.
FAQs
Can a landlord require a personal guarantee even if my business is an LLC?
Yes, just because your business has an LLC, it doesn’t prevent a landlord from asking for a personal guarantee from you. In fact, it’s common for commercial landlords to ask for a personal guarantee from newer or smaller businesses (regardless of the entity structure).
Can I negotiate a personal guarantee before signing a commercial lease?
You always have the option to negotiate the terms of the lease before signing the agreement. A commercial lease guarantee attorney can help with more favorable terms, such as caps, burn-off clauses, or other provisions that could protect your personal assets. Remember that it’s easier to negotiate the terms before you sign the lease, because you won’t likely have the option to make changes after the agreement is in place.
Signing a Commercial Lease? Have an Attorney Review Your Guarantee First
The best approach is to have an experienced attorney review your commercial lease personal guarantee before you sign. This legal review is most effective at the beginning, because your options are limited when you hire an attorney after a dispute has started.
At Bhojani Law, our experienced legal team is here to assist. Not only can we help with structuring the terms of your lease agreement, but we also offer legal representation for tenants who are already facing a guarantee claim. Our goal is to minimize your liability and ensure that you have legal support every step of the way. Reach out to learn more about available legal services and get personalized recommendations for your unique situation.