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The problem with a personal guarantee in a commercial lease

On Behalf of | Oct 31, 2022 | Business |

Sure, your business is pretty small – but it’s also pretty profitable. You’ve taken all the right steps along the way, including structuring the business as a limited liability company (LLC).

So, why is your company’s prospective landlord asking for a personal guarantee? Should you give them one? Here’s what you need to know:

Personal guarantees ramp up your potential losses

You created the LLC so that you could draw a bright line between your company’s assets and liabilities and your own. That was the only way to protect your personal property – your home, your car, your savings and your investments – in case the business failed. It was a wise move.

That could all be undone, however, if you sign a personal guarantee. This puts your own money back on the line if you have to default on the rent for any reason. Generally speaking, you want to try to minimize the risk you face, so that means asking yourself the following questions:

  1. Is this really your only option? If you can find a comparable property and location with a more agreeable landlord, you may want to take your rent money elsewhere.
  2. Is the landlord willing to limit your risks? You may also find that your prospective landlord is open to negotiations. That could mean agreeing to let the guarantee expire when you’ve been there a year, limiting the dollar amount they can claim as damages or specifically excluding certain items (like your home) from collection action.

Negotiating a commercial lease is very unlike a residential lease – but you are at a disadvantage if you’re not already experienced in this part of the process. Fortunately, there is legal guidance available.