Personal Guarantees: Signing Commercial Leases as an Individual

Imagine that you have a wonderful idea for a business. You’ve drawn up a business plan, secured funding, and readied production. All you need to worry about now is leasing a building for a business, and you’ve discovered the perfect location. The price is right, the space is ideally situated, and it offers plenty of room for expansion. You start to sign the lease in the name of your incorporated venture, but the landlord has a request: You’ll also need to put your proverbial John Hancock to a personal guarantee. Or perhaps the landlord says you can’t sign in the name of your company at all. Instead, you’ll need to sign in your own personal name.  

Guaranteeing a commercial lease or signing a commercial lease as an individual can seem a daunting prospect. Indeed, there’s a good reason why you should think twice if the requirements for leasing a commercial space include a personal guarantee. In this article, we’ll discuss what a personal guarantee is and how signing one could impact your business. 

What is a Personal Guarantee?

One of the great advantages of corporate structures is that they shield business owners from liability. If your enterprise goes belly up, its obligations die with it, and you aren’t personally liable for its debts and contractual agreements. While this is obviously a benefit for owners, it’s a major downside for landlords, especially when you factor in the idea that many types of commercial leases can be measured in decades. That’s where personal guarantees come into play. 

A personal guarantee is exactly what it sounds like: a promise from you as an individual that you will make good any obligations set forth in a signed document. For example, if your business fails and you’ve signed a personal guarantee for a lease, you will have to pay it in its entirety yourself. If you don’t, you could end up facing legal action, which might even include bankruptcy. 

Depending on your situation, you may not be able to avoid signing a personal guarantee for your commercial lease. Businesses with little credit history or that operate in a particularly risky business sector pose a problem for landlords, and they want to ensure that they won’t face undue losses. However, consider the following checklist before signing commercial leases so that you don’t make an unwise decision. 

Item #1: Consider What Type of Commercial Property You Are Renting

Leases are supposed to ensure that no ambiguity remains regarding the use of a particular property, who has access to and responsibility for it, and what compensation must be rendered. However, too often commercial lease agreement samples that business owners may have reviewed as academic examples lack the nuance found in real-life examples. For instance, are you signing a lease that grants you the ability to use an entire facility when you actually only need a floor, or vice versa? If you’re only using part of a building, must you contribute to the maintenance of common areas? Will you actually be using any of those common areas? If you’ve signed a personal guarantee, these details may make a big impact on your bottom line. 

Item #2: Can I Legally Use the Commercial Property for My Business?

As the hackneyed old saying goes, the devil truly is in the details, and that’s doubly true when it comes to commercial leases. You may have a specific idea as to what kind of business you’d like to run and how you’d like to run it. Perhaps you plan on expanding into different areas as it develops and grows. However, you need to ensure that your lease will allow your company to function in the way it wants. Confirm that your lease will let your business operate according to its purpose — or face a potentially devastating liability, particularly if you’ve signed a personal guarantee. 

Item #3: Determine Who Is Responsible for Repairs on A Rented Commercial Property

The answer as to who assumes responsibility for repairs in a commercial property will vary from lease to lease. While most leases specify that the landlord assumes responsibility for major repairs, this won’t necessarily hold true for every 10- or 5-year commercial lease agreement. Additionally, the definition of what constitutes a major repair can become a major sticking point when put into practice. Business owners who have signed a personal guarantee don’t want to suddenly discover that they must pay a large bill for something that doesn’t technically qualify as a major repair. Additionally, a lack of flexibility in repair clauses can lead to slower action if a landlord is indeed responsible, which may impact your business and increase your personal liability. 

Item #4: Ensure That the Lease Agreement Contains Protections for You

As you have likely gathered by now, personal guarantees basically solely benefit a landlord, not the residing tenant. If at all possible, you’d do better to sign a lease that doesn’t require one. However, you may find yourself in a situation where you’ve discovered an ideal property at an ideal rate and the landlord simply requires your guarantee. In these cases, make sure that you have certain protections in place that safeguard you. 

What do these protections look like? Well, we’ve already mentioned that that commercial leases can run for many years, and over those years, a business’ fortunes can wax and wane. For instance, suppose that your company works with a specific kind of technology and a new innovation renders it obsolete. You wouldn’t want to remain liable for a lease you no longer need or want. Common ways to guard against this potentiality include requiring a limited personal guarantee to a set initial number of months or to substitute a cash deposit for a personal guarantee. 

Before you sign a commercial lease, contact us here at Millennium Properties. We have nearly three decades of experience helping match lessees with ideal facilities throughout the Chicagoland area.