Should Commercial Landlords Ask for Personal Guarantees from Tenants?
Well-crafted commercial leases are designed to address every aspect of the landlord-tenant relationship. For commercial property owners, the lease should maximize cash-flow while minimizing risk, clearly outlining the respective rights and obligations of the parties. But of all the obligations assumed by a commercial tenant, none is more central than the obligation to pay rent and meet all ancillary financial responsibilities.
Standard Operating Procedure After 2008 Economic Collapse
Unfortunately, businesses fail. When they do, and a storefront or office closes its doors, commercial landlords often find themselves without recourse when trying to hold a tenant responsible for outstanding lease obligations. If the now-insolvent party to the lease was a corporation, limited liability company, or other business entity which shields its owners from personal liability for corporate debts, the landlord will usually be left holding the bag. That is exactly what happened on a massive scale after the 2008 collapse of the real estate market.
That is why most commercial landlords now ask for personal guarantees from the owners of prospective tenants, especially tenants which are start-ups or new businesses lacking a strong credit history and steady revenues. Understandably, most business owners are resistant to the idea of signing a personal guarantee as it defeats the primary purpose of operating under a corporate structure that shields their personal assets. However, the changing commercial real estate landscape over the past decade makes it unlikely that any early-stage or small business will be able to find suitable space without having to sign a personal lease guaranty.
Full or Limited Guarantee
When crafting a personal guarantee of a commercial lease, landlords (working with experienced commercial real estate counsel) need to be detailed and specific as to which lease obligations the guarantor will be responsible for upon default. A “full” guarantee can apply to any and all monetary and non-monetary aspects of a lease, including:
- All fixed rent payments
- Any recurring additional rent due under the lease, such as for utility bills, common area maintenance costs, real estate taxes, and insurance premiums
- Other non-recurring fees, such as late charges, landlord review fees, and attorneys’ fees incurred in enforcing the lease and/or guarantee
- The completion of any improvements or alterations at the premises for which the tenant is responsible.
A limited guarantee can be applicable to specified lease obligations or have limits on the duration or maximum liability under the guarantee.
Commercial landlords should always consult with experienced counsel when considering, negotiating, and drafting a personal guarantee of a lease to ensure that their rights are protected and their exposure upon default by the tenant is limited.
McDonald Fleming Moorhead: Pensacola Commercial Lease Attorneys
Commercial landlords rely on their tenants and their leases to succeed. Issues can arise when a tenant fails to pay rent or does not abide by the terms of the lease. Led by Board Certified Real Estate Attorney Stephen R. Moorhead, the Pensacola commercial real estate attorneys at the McDonald Fleming Moorhead law firm can help commercial landlords understand their legal options and take steps to protect those interests.