How To Spot Key Elements in a Commercial Lease: Personal Guarantee in Commercial Leases

Hey everybody, Joseph Gozlan with Eureka Business Group. And today we continue with our series of videos about commercial leases. And today we’re going to talk about a clause called the personal guarantee.

What is a personal guarantee? A personal guarantee is a very common clause in a contract where the tenant is usually a first time business owner or a maybe it’s their second location. They’re not very established. It’s not the big company. So the landlord needs to feel comfortable that even if the business is struggling or if the business is not doing as great as was expected, that the rent is still getting paid and still getting paid on time, and there’s a real strong financially person behind the lease, and they can lease that space because a lot of the time the landlord is going to have a very significant investment up front in terms of a T I budget or free rent or, doing the construction themselves.

So they want to make sure that there’s going to be a guarantee behind the lease. So who should sign the personal guarantee on the contract? Let’s say I am the business owner. I have a donut shop and that donut shop is Donuts Are Awesome LLC.

I have created my company. I’m going to sign the lease in the name of my company. But the landlord is going to require me, Joseph, the person, to sign a personal guarantee on the lease that says whatever happens, I’m going to make sure that the landlord gets his rent paid for the duration of the agreed lease under the same terms.

So it’s going to be the person and it’s going to be the person behind the company. Usually it’s the owner because most of the time we’re talking about a small business owner that he’s the sole proprietor or he’s got a very small LLC and he’s the only partner or it’s going to be one of the main partners in the LLC that has a material interest.

It cannot be my uncle if he’s got no relations to the company. So that’s who’s going to sign the personal guarantee. The question I usually get asked is if I sign this thing and something happens, are they going to take my home?

probably not because in a state like Texas, where you have homestead rights, you’re not, nobody’s going to touch your home. But they can sue you personally, and whatever judgment is going to come in after the court case, you’re going to have to adhere to that.

Realistically, no, they cannot touch your home, but yes, you will be financially responsible for the lease. I get asked why isn’t my company enough? Repeating what I said earlier, normally it’s done when you have a small business owner. that the business and the person are very much the same entity.

So unless you have a chain of 40 stores and you are a national or a regional player, Most of the time, the landlord will require a personal guarantee. I also get asked by tenants do landlords really pursue this stance? The answer is it depends. Some landlords are just gonna let it go. Some landlords are gonna be litigious and they’re gonna will put a court claim or they’ll put a debt or they’re gonna put a lien on something that you own.

Definitely, there’s gonna be a lien against the company that signed the lease. I also get asked what if I need to get out? What are my options? Almost every contract that we’ve seen these days on the commercial side of things has the option to sublease or to assign the lease. You don’t have to think about the worst case scenario of the business failing, but there’s also a great case scenario where you’re selling the business, you’re exiting, you bought the business and enhanced it or you created the business out of scratch and you created this wonderful profitable business and you’re selling it.

The person that’s coming in and buying the business from you is going to have to assume the lease. That’s really what it is. It’s a lease assignment or at least transfer depends on the contract and the language in it. But there are ways, legitimate ways to get out of a contract.

and out of your personal guarantee without the business being in a complete failure. Now, as usually in these videos, we’re going to switch the direction and we’re going to talk about the personal guarantee clause from the landlord’s perspective. As I mentioned earlier, if you’re a landlord and we’re putting a lease together with a first time business owner, We want to do a solid screening.

We want to vet the person financially. We want to make sure that even if the business or the business plan doesn’t go smooth, doesn’t go as predicted, they still have the financial strength to support that. They can still pay their own bills. They can still pay the rent. They can still pay utilities, and they’re not gonna completely fall apart, leave you with all that money spent on T.

I. And all that time that was spent between the time they signed the lease and the time this happens, and you have nothing in your hand. So personal guarantee not only helps us with vetting the person as part of the screening process, Because if they’re not willing to sign a personal guarantee, that’s a red flag.

It also allows you to make sure that you have a go to person, who’s behind that LLC that signed the contract and that person is going to stand behind the lease. So that’s a very important thing to look at as well

so to wrap it up a personal guarantee, make sure there is a real person signing the contract and is financially responsible to it on top of whatever. LLC or company was created in order to fulfill the business requirement over there. And then it is good for both sides. It’s important that you understand what you’re signing on and what it means and what’s the consequences that could come with it.

And for the landlord, it’s an important tool to make sure that the person behind the contract is solid financially and is willing to stand up behind their financial obligations. That’s it for today. My name is Joseph Gozlan. I’m with Eureka Business Group. We are a retail. Commercial brokerage in Texas, specializing in the DFW market.

If you’re a tenant needs to find a space, if you’re a landlord that needs help loosening up their space or management, if you’re an investor looking into expanding your retail portfolio, give us a call. We can help all of you guys. And we’re here for every questions. Just put it in the comments. Thank you.

And we’ll see you in the next part.