Starting a business takes hard work and extensive planning. When a business struggles financially or closes its doors, landlords may seek payment from the individual who signed the personal guarantee, even if the company itself no longer operates. Understanding how these provisions work can help business owners make informed decisions before signing a lease.
In addition, one must sign a commercial lease agreement for occupying a specific space, including but not limited to the following.
- Retail storefront
- Warehouse
- Restaurant
Personal Guarantee: An Overview
A personal guarantee is a contractual agreement made by an individual from one of the following.
- Owner
- Shareholder
- Member of the business
Rather than relying only on the company to pay rent or other lease-related expenses, the landlord receives an additional layer of financial protection through the individual signer.
Depending on the lease agreement, the guarantee may apply to the following.
- Unpaid rent
- Future rent owed under the lease
- Property damage
- Common area maintenance (CAM) charges
- Taxes and insurance obligations
- Attorney's fees and court costs if permitted by the lease
- Costs related to default or early termination
Personal Guarantees: Why They Are Often Requested
Many small businesses have limited operating history or assets when entering into a lease. Even established businesses may experience unexpected financial challenges.
A landlord may request a personal guarantee as a result of the following scenarios.
- The business is newly formed.
- The company has limited credit history.
- Revenue is unpredictable.
- The lease term extends for several years.
- The landlord wants additional assurance regarding lease payments.
Business Owners
After signing a commercial lease, business owners may assume the company alone is responsible for lease obligations.
Months or years later, the business experiences financial hardship due to factors such as:
- Economic downturns
- Inflation
- Supply chain disruptions
- Loss of major customers
- Labor shortages
- Increased operating costs
- Natural disasters
- Declining sales
When the business closes, owners are oftentimes surprised that the landlord may seek payment under the personal guarantee.
Personal Guarantees and their Different Types
Not all guarantees are identical. Some commercial leases contain an unlimited guarantee. This may make the guarantor responsible for lease obligations until the lease expires or is otherwise resolved.
Other agreements contain limited guarantees that may:
- Cap the total amount owed
- Expire after a certain period
- End after timely rent payments
- Apply only to specific lease obligations
- Reduce liability if the lease is assigned
Business owners should carefully review which type of guarantee is included before signing.
How Liability is Determined
Several situations may activate a personal guarantee, including:
Business Closure
If a business permanently closes before the lease expires, unpaid lease obligations may become an issue.
Missed Rent Payments
Failure to make rent payments may trigger default provisions under the lease.
Bankruptcy of the Business
A business bankruptcy does not automatically eliminate obligations created by a personal guarantee. The effect of bankruptcy depends on numerous legal factors, including whether the individual guarantor also seeks bankruptcy protection.
Are Negotiations Possible?
In many situations, commercial lease terms are negotiable.
Depending on the circumstances, business owners may discuss provisions such as:
- A limit on personal liability
- A reduced guarantee after several years
- Automatic termination of the guarantee after consistent payment history
- A fixed dollar cap
- Alternative security deposits or financial assurances
Negotiation opportunities often depend on market conditions, the financial strength of the business, and the landlord's willingness to modify lease terms.
Landlords vs. Personal Guarantees
When a business defaults, landlords usually review the lease to determine available contractual remedies.
Depending on the circumstances, disputes may involve questions such as:
- Whether the guarantee was properly executed
- Whether the landlord complied with lease requirements
- The amount of damages being claimed
- Whether rent calculations are accurate
- Whether the landlord had a duty to mitigate damages under applicable law
- Whether modifications to the lease affected the guarantee
- Whether settlement discussions are appropriate
Every commercial lease dispute presents unique facts that should be carefully evaluated.
Business Owners: Important Steps to Take
The following are important steps business owners should take.
- Reading every provision before signing it
- Reviewing personal guarantee language carefully
- Understanding when liability begins and ends
- Keeping copies of all lease amendments
- Maintaining communication with the landlord if financial issues occur
- Seeking legal guidance before signing significant lease modifications
It may be important to take these steps to ensure your safety.
The Importance of Seeking Legal Guidance and Support
Oftentimes, both businesses and individuals are affected by commercial lease agreements. This is because they usually contain specific conditions and requirements. It is also important to note that after a business is closed, personal guarantees can still create financial obligations. Seeking legal guidance and support may help victims understand the terms of their agreement as well as their rights moving forward. These topics can quickly become very challenging and complicated; therefore, speaking to a personal injury attorney may help individuals move through the legal process much more smoothly.
How KAASS LAW Can Help
At KAASS LAW, we understand the challenges that victims may face when dealing with commercial lease agreements and the complications they may create. Oftentimes, these conflicts may require an extensive review of the lease agreement, financial records, and communication between various individuals. The attorneys at KAASS LAW can help individuals understand the entirety of the lease agreement so they feel supported throughout the legal process. Call KAASS LAW today to learn more.