Personal guarantees are not legally mandatory for commercial leases, but many landlords request them for additional security. Generally, signing a personal guarantee means you will accept responsibility for your business’s financial obligations if it fails to meet them.
With this in mind, it is crucial to know what a personal guarantee can entail if your business struggles. Below are some of the most important things you need to consider.
There are several types of personal guarantees
Commercial landlords can use several types of guarantees, but here are some of the most common:
- Full or absolute guarantee: Most landlords require a full guarantee because it gives them more coverage. This makes you responsible for all lease terms without any cap on the amount.
- Limited guarantee: This type of guarantee sets a maximum dollar amount that you are responsible for. Some landlords start with a full guarantee and then transition to a limited one after the tenant shows trustworthiness.
- Springing guarantee: A springing or bad acts guarantee only becomes effective if the tenant meets or triggers certain conditions. For example, this guarantee might “spring” into effect if you default on the lease.
Whatever guarantee the landlord is asking you to sign, be sure to read the terms carefully and take enough time to weigh your options. Consider consulting with a commercial real estate lawyer to help you assess the riskiness of the lease.
What are the risks of a personal guarantee?
The biggest risk of a personal guarantee is that it extends the business’ financial responsibility to your personal assets. This bypasses the limited liability protection typically offered by business structures like LLCs or corporations.
Moreover, commercial leases often span several years. This means a guarantee can lock you into a long-term obligation. Your personal circumstances may change, but the guarantee remains in effect.
Lastly, you must consider the unpredictability of your business. If your business suddenly experiences a low period, your personal finances could be on the line.
How can you protect yourself?
A personal guarantee is often risky, but you may be able to reduce your liability by negotiating for a limited guarantee. Other than that, you can seek alternatives, such as offering a larger security deposit, establishing your creditworthiness or including release clauses to let you break from a guarantee when necessary.