Whether you are embarking on a new business venture, expanding existing business operations, or renegotiating a commercial lease for your business space, a commercial landlord may ask you to sign a personal guarantee of the lease. That is particularly likely for a small business, start-up, or a business with limited financial history or resources. The reason is simple; most small businesses are limited liability companies or corporations that limit the personal liability of individual members or shareholders. If your business ultimately defaults on a commercial lease and is insolvent or has no remaining assets, then the landlord will have no way of recouping its losses.
A personal guarantee gives the landlord an avenue of relief if your business defaults on the lease. It will make you personally liable for any debts or damages that arise out of the commercial lease. If your business cannot meet its financial obligations to the landlord, the landlord can sue you for the non-satisfaction of those obligations. Thus, the choice to personally guarantee a commercial lease is important, and you should be aware of the potential consequences before making that choice.
Although you should avoid signing a personally guarantee of a commercial lease if you can, the reality is that it may be unavoidable. You may have no other way to obtain space for your business. The landlord, however, may offer you certain incentives to execute a personal guarantee, such as a reduced security deposit or a discounted rental rate. Thus, you can try using it as a negotiating tool. And from a practical standpoint, as long as you pay the rent, the personal guarantee should not adversely affect you.
Also, if you sign a personal guarantee of a commercial lease and your business later defaults on the lease, there are potential defenses to the enforcement of the guarantee. For instance, your landlord may have breached the lease in some way, perhaps by failing to maintain the property or similar actions that compromised your ability to do so business or generate revenue. Likewise, a landlord has the duty to mitigate its damages, or minimize the losses resulting from the breach of a lease, for example, by finding another tenant for the remainder of the lease term.
At Williams Mestaz, L.L.P., we dedicate our efforts to protecting your rights and interests with respect to commercial leases, business contracts, and any other business-related matters. We will gather the facts surrounding your case, present your options, and work with you to develop the best strategy for your case. Contact Williams Mestaz, L.L.P. at 602-256-9400.