COMMERCIAL LEASE GUARANTEES: WHAT EVERY BUSINESS OWNER NEEDS TO KNOW
You’ve organized your business, executed governing documents with your partners, obtained all required licensing, and are now ready to sign your commercial lease. Many, if not most, commercial landlords will require a guarantee of some sort to protect the landlord in the event tenant defaults. Understanding the type of guarantee that is required by the landlord is critical to your business’ success.
- Corporate Guarantee
A corporate guarantee is when a parent or affiliated company guarantees the lease obligations of a subsidiary or related entity. A landlord may require this type of guarantee when a newly formed business, with no financial history, is leasing space but has a financially stable parent company that can back the lease.
- Personal Guarantee
A personal guarantee requires an individual, most often the business owner(s), to be personally liable for lease obligations. This means that the landlord may potentially collect against the personal assets of the guarantor(s), such as savings accounts, real property (including personal residences) or investment accounts in the event of tenant’s default. Personal guarantees are common for new businesses without an established credit history, and they can come in several forms:
3. Limited Guarantee
A limited guarantee limits the liability of the guarantor(s) to a specific amount or timeframe. For example, a personal guarantor might only be liable for the first 12 months of rent or up to a maximum financial cap. Limited guarantees are a way for tenants to negotiate reduced personal exposure while still providing some level of security to the landlord.
4. Performance Guarantee
A performance guarantee ensures that rent and all other obligations under the lease, such as maintenance, renovations or operational duties, are paid or performed. If the tenant fails to perform these obligations, the guarantor(s) is/are responsible for ensuring compliance or compensating the landlord for the shortfall. This is more common in leases that involve build-out requirements or long-term maintenance agreements.
5. Good Guy Guarantee
A Good Guy Guarantee is very common in commercial leasing. It allows the guarantor(s) to be released from personal liability for rental obligations that accrue after the leased premises are surrendered to the landlord in good standing. Here, it is typically required that the tenant provide a specified amount of advance notice to the landlord of its intent to vacate. There are often other conditions imposed in connection with releasing the post-surrender obligations, and they vary greatly.
6. Bank Guarantee
A bank guarantee involves a financial institution providing assurance that lease obligations will be met. Here, the tenant will typically deposit a sum of money with the lender, and in return, the bank issues a guarantee to the landlord. This option is normally used in high-value lease agreements.
No matter the type of guarantee you may be asked to sign, it is essential that the services of seasoned legal counsel be retained. It goes without saying; the devil is always in the details. You may have agreed to a specific type of guarantee, but the drafting of same may negate or, at best, modify your intention. For example, a proposed lease may purport to include a “Good Guy Guarantee” when, in fact, the verbiage, pre-conditions and qualifiers included in the drafting essentially create a full, personal guarantee of performance. As with any other legal agreement, one single word can change the entire landscape of a guarantee. The tenant “may” is entirely different from the tenant “shall.”
If you are entering into a Lease that includes a guaranty, we at Schwartz Ettenger can provide you with the necessary guidance to ensure that the documents match your expectations. Do not hesitate to reach out for a consultation.