The lease for the business premises is usually one of the more important, if not the most important, of the contracts entered into by a new business. If the tenant is a closely-held corporation or limited liability company, most landlords will require that a personal guaranty of the lease obligations by the shareholders or members be signed along with the lease. From the tenant’s principal’s point of view, this is an unwelcome requirement because it puts his personal assets at risk for satisfying the company’s obligations under the lease, including payment of rent. From the landlord’s point of view, it increases the likelihood that the rent will be paid, gives the landlord recourse if the lease is violated (beyond the resources of a thinly-capitalized or financially troubled venture), and strengthens the landlord’s hand in any negotiations concerning a buy-out or modification of the lease down the road.
Many small businesses are owned by a husband-and-wife team. In that case, landlords may insist on both spouses guaranteeing the tenant’s lease obligations. This makes the couple’s assets, including the marital residence, available to the landlord to satisfy the tenant’s obligations.
Under a full, unlimited guaranty, the guarantors guarantee all obligations of the tenant, including payment of rent until the expiration of the lease term. Surrendering the premises back to the landlord will not satisfy the tenant’s obligation to pay the full amount of rent due under the lease. In cases where many more months or years remain on the lease, this can be a very onerous, if not ruinous, obligation for the guarantors. As a practical matter, the amounts due can be mitigated by the landlord’s releasing the premises to another tenant, but the guarantors would still be liable for the landlord’s expenses in so doing. These can include costs incurred to market and lease the property, including realtor fees, and, if the new tenant pays a lower rent, the difference between that rent and the rent set forth in the defaulting tenant’s lease.
Except in a very depressed market, few landlords are willing to rent to a start-up business without a personal guaranty. However, they will sometimes accept a guaranty that is limited in one or more respects. A guaranty may be limited to less than the full lease term, perhaps expiring after a certain number of months or years in which the rent has been paid in full and on time every month. Another option is the “good guy” guaranty. This limits the guarantor’s obligation to the rent due and payable until the tenant surrenders the premises back to the landlord. This may allow the guaranteeing principals the opportunity to cut their losses by causing the tenant to vacate the premises promptly, particularly where the lease has a long term remaining.
Landlords may also agree to a buy-out of the remaining lease term, where the tenant is released from the lease in exchange for an amount of money less than the accelerated rent and costs under the lease. If there is no personal guaranty, the landlord has a greater incentive to negotiate a buy-out rather than pursue an insolvent tenant. On the other hand, the stronger the guaranty, the less the landlord’s incentive to accept less than what is owed and guaranteed.
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Business Leases & Personal Guaranties
The lease for the business premises is usually one of the more important, if not the most important, of the contracts entered into by a new business. If the tenant is a closely-held corporation or limited liability company, most landlords will require that a personal guaranty of the lease obligations by the shareholders or members be signed along with the lease. From the tenant’s principal’s point of view, this is an unwelcome requirement because it puts his personal assets at risk for satisfying the company’s obligations under the lease, including payment of rent. From the landlord’s point of view, it increases the likelihood that the rent will be paid, gives the landlord recourse if the lease is violated (beyond the resources of a thinly-capitalized or financially troubled venture), and strengthens the landlord’s hand in any negotiations concerning a buy-out or modification of the lease down the road.
Many small businesses are owned by a husband-and-wife team. In that case, landlords may insist on both spouses guaranteeing the tenant’s lease obligations. This makes the couple’s assets, including the marital residence, available to the landlord to satisfy the tenant’s obligations.
Under a full, unlimited guaranty, the guarantors guarantee all obligations of the tenant, including payment of rent until the expiration of the lease term. Surrendering the premises back to the landlord will not satisfy the tenant’s obligation to pay the full amount of rent due under the lease. In cases where many more months or years remain on the lease, this can be a very onerous, if not ruinous, obligation for the guarantors. As a practical matter, the amounts due can be mitigated by the landlord’s releasing the premises to another tenant, but the guarantors would still be liable for the landlord’s expenses in so doing. These can include costs incurred to market and lease the property, including realtor fees, and, if the new tenant pays a lower rent, the difference between that rent and the rent set forth in the defaulting tenant’s lease.
Except in a very depressed market, few landlords are willing to rent to a start-up business without a personal guaranty. However, they will sometimes accept a guaranty that is limited in one or more respects. A guaranty may be limited to less than the full lease term, perhaps expiring after a certain number of months or years in which the rent has been paid in full and on time every month. Another option is the “good guy” guaranty. This limits the guarantor’s obligation to the rent due and payable until the tenant surrenders the premises back to the landlord. This may allow the guaranteeing principals the opportunity to cut their losses by causing the tenant to vacate the premises promptly, particularly where the lease has a long term remaining.
Landlords may also agree to a buy-out of the remaining lease term, where the tenant is released from the lease in exchange for an amount of money less than the accelerated rent and costs under the lease. If there is no personal guaranty, the landlord has a greater incentive to negotiate a buy-out rather than pursue an insolvent tenant. On the other hand, the stronger the guaranty, the less the landlord’s incentive to accept less than what is owed and guaranteed.