Essential Landlord Provisions in a Commercial Lease - Personal Guarantee
John Doe is an aspiring entrepreneur and wants to lease a building for his brilliant restaurant idea. John Doe sets up ABC Restaurant, Inc. ABC Restaurant, Inc. and the landlord enter a five-year lease. The landlord incurs $30,000 in tenant improvement expenses.
One year later, John Doe’s restaurant idea is no longer so brilliant. He is three months behind in rent. He decides to throw in the towel.
The landlord has lost tens of thousands, and the amount may continue to increase if it cannot find another tenant soon. The landlord wants to sue John Doe. But, it can’t. ABC Restaurant, Inc. signed the lease, and it has few or no assets. The landlord will most likely be unable to recover the money it lost.
In almost every commercial lease situation, the landlord should insist on a personal guarantee from the owner of the tenant, allowing the landlord to enforce the lease and pursue money damages against the owner individually as well as the tenant entity. This will also give the owner an incentive to put the landlord at the top of the creditor priority list. It may also discourage the owner from throwing in the towel too early, with the knowledge that his or her personal assets are on the line.
Of course, if there is more than one owner, a personal guarantee from each owner is recommended. The more pockets a landlord has access to, the better.
If the owner tries to avoid a personal guarantee by showing good payment history, substantial funds, etc., the landlord's response can be: “That’s great, then you shouldn’t have to worry about signing the guarantee.”
The landlord can also be creative in negotiating with a resisting owner by proposing a limited guarantee; for example, for the amount of tenant improvements and a portion of the rent.
This Article provides general information only and should not be considered legal advice. Please consult a professional regarding your specific situation.