Commercial Leasing Basics – The importance (and dangers) of Personal Guarantees

Often in entering into a new commercial lease, the landlord will insist that the tenant offer a separate personal guarantee, particularly where the tenant is a company or an individual with little to no assets.

A personal guarantee is basically a legally enforceable personal promise made by an individual to the landlord guaranteeing the obligations of the tenant under the lease.

In circumstances where the tenant is a company, it is often customary for the company’s directors to be nominated as the guarantors.

Guarantees under a lease are a serious undertaking and often times the lease terms will require that:

1. all of the financial obligations under the lease are guaranteed (not just rent);
2. the guarantees cannot be revoked without consent of the landlord; and
3. the guarantees are ‘joint and severable’, meaning that, in circumstances where there are multiple guarantors (i.e. two directors), any one guarantor can be called upon to cover some or all amounts which the tenant owes.

Key takeaways for Tenants:

Personal guarantees expose the guarantor to personal liability and place their assets (such as a family home) at risk.

They are particularly fraught with danger where the guarantor is not personally involved in the tenant business (for example a parent or spouse of the tenant) or there is a possibility that guarantor may, at a later time, not be involved with the tenant business because of a resignation or other departure.

It can for example be particularly difficult to obtain consent from a landlord to release one guarantor who was previously a director of a tenant company, and thus that person will have the guarantee hanging over their head until such time as the lease is concluded and the tenant has made good on all its financial obligations.

Where possible, commercial tenants and individuals should seek to avoid the need for personal guarantees under a new lease. This can sometimes be negotiated with the landlord by:

• offering additional security in the form of a higher security deposit;
• agreeing to a higher bank guarantee to secure the tenant’s obligations;
• offering other concessions to the landlord such as taking a longer term lease, accepting higher annual increases, bearing the cost of any renovation works that may be required at the property etc.

Key takeaways for Landlords:

A personal guarantee under a lease can be an effective tool to ensure continued compliance with the tenant’s financial obligations. It is important to understand though that a personal guarantee is only as good as the person standing behind it. Accordingly, landlords should ensure that:

• the personal guarantors are of sound financial standing (preferably with assets of their own);
• where there are multiple directors of a tenant company, all directors offer a personal guarantee;
• personal guarantee sections under a lease are properly and separately executed by the guarantors. Courts will often scrutinise guarantees meticulously in order to give them effect so it is important that they meet the rigours of an acceptable and legally enforceable guarantee.

Paramount to personal guarantees (both from a landlord and tenant perspective) is sound professional advice.

If you need advice in relation to lease guarantee obligations or some assistance with negotiating the terms of your commercial lease generally, get in touch for some practical, commercial legal guidance.