Getting a Commercial Lease — Without Signing a Personal Guarantee

There was a time when entrepreneurs and small business owners were able to negotiate commercial leases without a personal guarantee. Landlords were often willing to forgo a guarantee in exchange for higher rents, longer lease terms, or larger common area maintenance (CAM) fees. But now, when leasing commercial space, the times are changing.

Landlords, like banks, think in terms of “reasonable risk.” If your business fails and defaults on its lease, then your landlord is liable for the balance. Recently, hard times for the commercial real estate market have caused landlords to reconsider what constitutes a reasonable amount of liability.

Across the country, from New York to California, skittish landlords are demanding personal financial guarantees from business owners, even if the business in question has been organized as a limited liability company (LLC). And even if you have a strong record of repayment and your business is in the black, a landlord may require a time-limited guarantee in order to reduce their own financial risk.

If your landlord absolutely will not budge, then it may be possible to negotiate the terms of your guarantee to limit its impact on your personal finances, your business’s operational capacity, or both. Here are some options for finding a compromise that satisfies your landlord while protecting your personal assets.

Understanding Commercial Leases

A commercial lease is a legally binding contract between a landlord and a business tenant that outlines the terms and conditions of renting a commercial property. Unlike residential leases, commercial leases can be more complex and involve extensive negotiation. As a business owner, it’s crucial to understand the intricacies of these agreements to help ensure you’re securing the best deal for your business.

Key elements of a commercial lease agreement include the rent amount, security deposit, lease duration, and any additional costs the tenant may incur. For instance, some leases may require the tenant to cover maintenance or utility expenses. Being well-versed in these terms can help you avoid unexpected costs and ensure that the lease aligns with your business needs.

Types of Commercial Leases

Commercial leases come in various forms, each with its own set of characteristics. Understanding these types can help you choose the best option for your business:

• Gross Lease: In a gross lease, the landlord covers all property-related expenses, including utilities, insurance, and maintenance. This type of lease offers simplicity, as the tenant only needs to pay a fixed rent amount.
• Net Lease: A net lease requires the tenant to pay a base rent plus additional expenses such as utilities, insurance, and maintenance. This type of lease can be further divided into single, double, or triple net leases, depending on the number of expenses the tenant is responsible for.
• Modified Gross Lease: This lease combines elements of both gross and net leases. Typically, the tenant and landlord share the property expenses, making it a flexible option for both parties.
• Percentage Lease: In a percentage lease, the tenant pays a base rent plus a percentage of their gross income. This type of lease is common in retail spaces where the landlord benefits from the tenant’s business success.

Negotiating the Terms of Commercial Lease Agreements

Just because your landlord is demanding a guarantee doesn’t mean that you can’t negotiate a creative, mutually beneficial lease.

• Request a time-limited guarantee. Ask your landlord to reduce the period covered by the personal guarantee to one or two years, rather than the entire term of the rental. Most unsuccessful businesses fail within the first two years, so it’s entirely reasonable to request that your guarantee expires after 18, 24, or 30 months, provided that all other payments and fees are up to date.
• A landlord may be willing to accept a so-called “good guy” guarantee. This agreement holds the guarantor liable until the tenant has lawfully left the premises (see our guarantor definition guide for more information on this term). This protects the landlord from “cut-and-run” defaulters. If your business is failing, or if you need to relocate to another space, the landlord agrees not to enforce the guarantee, provided that you pay your rent until the agreed-upon departure date.
• It’s wise to ask that your guarantee be waived upon transfer of the lease. If you sell your business to a new operator, or if your landlord transfers ownership or management of the space to a new lessee, then you don’t want to be stuck guaranteeing anything!

Key Terms to Know

When negotiating a business lease, it’s essential to understand the key terms and conditions to protect your interests:

• Rent: The monthly payment the tenant makes to the landlord for occupying the commercial space. It’s crucial to ensure the rent amount is sustainable for your business.
• Security Deposit: A deposit paid by the tenant to secure the lease. This amount is typically refundable at the end of the lease term, provided there are no damages or unpaid rent.
• Lease Duration: The length of time the tenant has the right to occupy the property. Lease terms can vary, so it’s important to choose a duration that aligns with your business plans.
• Tenant Improvement Allowance: A sum of money provided by the landlord to cover the cost of improvements to the property. This allowance can help you customize the space to meet your business needs.
• Personal Guarantee: A clause that holds the business owner personally responsible for fulfilling the lease obligations. Understanding this term is crucial, as it can impact your personal finances.

Resolving Disputes

Disputes can arise during the term of a commercial lease, and having a plan in place for resolving them is essential. Common disputes include disagreements over when and how you pay rent, property use, and lease termination. To resolve these issues, consider the following strategies:

• Negotiation: Open communication with your landlord can often resolve disputes amicably. Discussing the issue and finding a mutually beneficial solution can prevent escalation.
• Mediation: If direct negotiation fails, mediation can be a valuable tool. A neutral third party can help facilitate discussions and guide both parties toward a resolution.
• Legal Assistance: In more complex or contentious disputes, hiring a commercial real estate attorney can provide the expertise needed to protect your interests and navigate the legal aspects of the dispute.

Is it still possible for a business owner to avoid a personal guarantee?

So the question still remains… Is it possible to negotiate a true no-personal-guarantee business lease? Absolutely! But it’s not easy. For first-time entrepreneurs, a personal guarantee may be unavoidable, but if your business has a demonstrable record of repayment, adequate capital, and a strong balance sheet, you may be able to convince a landlord to waive the guarantee entirely.

Typically, a landlord will ask that you offer a retainer or a larger security deposit in lieu of a personal guarantee. The down side? This means tying up cash that could otherwise be accumulating interest.

You need to keep your balance sheet in mind and make sure that a cash deposit will not undercapitalize your business. The number one reason why unsuccessful small businesses fail? Insufficient working capital. If possible, it’s always best to offer non-cash corporate assets — equipment, for instance — as collateral, rather than a cash deposit.

When all is said and done, your peace of mind is invaluable. As the business owner, you need to be able to objectively appraise your business, make decisive decisions, and stand behind your choices.

Seeing clearly and acting with certainty will always be more difficult when your personal wealth and personal assets (and, by extension, the financial security of yourself and your loved ones) are at stake. In the end, you may decide that it’s best to sacrifice a small amount of working capital for the sense of well-being afforded by a no-personal-guarantee loan.

Working with a Commercial Real Estate Attorney

Navigating the complexities of a commercial lease agreement can be challenging, which is why working with a commercial real estate attorney can be invaluable. These professionals offer several benefits:

• Expert Knowledge: Attorneys have a deep understanding of commercial lease agreements and can help you comprehend the fine print.
• Negotiation Skills: An attorney can negotiate favorable terms on your behalf, ensuring the lease aligns with your business needs.
• Representation: During lease negotiations, having an attorney represent your interests can provide peace of mind and ensure a fair outcome.
• Dispute Resolution: If disputes arise, an attorney can offer guidance and representation, helping you resolve issues efficiently and effectively.

By partnering with a commercial real estate attorney, business owners can secure the best possible lease terms and avoid potential pitfalls, ensuring their business thrives in its new commercial space.

Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.