Finding your office space could be a complex task. You look for the perfect location, décor, amenities and also a lease that suits your business. Finding the right landlord is also essential but mostly the landlords tend to be a little hesitant towards renting out their land/space to new start-up businesses that have little track records. Landlords might also ask for additional clauses (like personal guarantee) to ensure that they get their rent.
Business contract for commercial lease
The business contract are agreements between the companies and not between individuals. For example, the parties that are involved in the commercial lease are the landlord (company X, LLC) and the tenant (Company Y, LLC). The individual owners of these companies are not parties to the contract and so are not obligated under the contact. For example, if company Y breaches the contract by not paying the rent on time then company X can sue company Y. However, Company X cannot sue the individual owner of company Y. To prevent such scenarios landlords insists on adding the personal guarantee clause to the commercial lease contract.
How does personal guarantee work and is there a way of getting out of it?
A personal guarantee in a commercial lease is what makes you personally liable for renting a space if the business can’t pay. This essentially means that in case your business fails to be successful and does not generate enough funds, then you can be sued and held liable to pay any unpaid rent from the commercial lease. Considering the failure rate of new businesses in general, this is an essential measure to protect landlords from monetary losses. However this does not offer much financial or legal protection to the small business owners. The option for the business owner to the best interest would be to not have such clauses in the lease at all.
4 ways to negotiate the personal guarantees clause in the commercial lease contract
1Track record
You can avoid personal guarantee by showing pre-existing steady profits or previous consistent rent payments records
If you can’t do this, following are a couple of options you could use to negotiate further:
2Time Release
The personal guarantee could be requested to be considered as expired after a certain amount of time and after certain amount of proven payment. For example, if you are signing a lease for 5 years then you can request that the personal guarantee lasts for the first 3 years.
3Letter of Credit
If you have the financial resources, then you can offer to put a letter of credit in place for a set dollar amount. This letter can be tapped if the tenant abandons the property.
4Good Guy Clause
You can insists on adding the ‘good guy clause’ to your business contact. The good guy clause holds the tenant personally responsible for paying the rent, if the company failed to do so. However, if the tenant gives the landlord notice (usually 30-180 days), they can be released of this responsibility. This depends on the tenant having paid all the rent up to the surrender date and leaving the office neat and tidy.
How to get out of the personal guarantee early ?
In case you have signed a personal guarantee as part of commercial lease, you have fairly limited ways of exiting the lease. You can either ask for an amendment or re-negotiate the guarantee terms. You could also offer a settlement to your landlord on the remaining rent or deal with the whole matter in court later. Thus it is advisable that you contact an attorney before exiting the lease.
Originally posted 2017-08-20 23:33:22.
