This is a transcript of an episode of the LeaseSmart Podcast.
Craig: Today I want to address something that we argue about a lot and that is the personal guarantee. It depends upon whether the landlord is contributing a lot of money to your space to get you in there? If that is the case, then it’s fair enough to require a personal guarantee from the renter. It’s all a matter of mathematical computation. How much does a landlord put into the space you’re renting? How much is he going to get back in rent? Is he making money with his real estate? Many times, we don’t sign anything personally. If the company is big enough and has enough credit, then they’d never even ask you to sign personally but for small mom and pop shops where you just formed an LLC that has no assets, it is fair for the landlord to have some form of personal guarantee. That’s why they’d be looking at your financials. They want to make sure they’ll get rent after they do this deal.
Now, as far as the personal guarantee is concerned, we can still modify that to some degree. Obviously, the landlord would prefer to have you personally guarantee the lease for the length of the lease and that happens sometimes. It’s still fair and fine.
Other times, we looked at how much the landlord has put in and limit the personal guarantee accordingly. We do this because it is a contingent liability on the tenant’s behalf and it makes it harder to do future deals and finance future deals if you have this contingent liability out there. So it’s really legitimate to say, “I need to eliminate this at some point in time.” There are a few ways we do it.
One, we call it an Evergreen Guarantee, where, if you have a 10 year lease, you’re not really guaranteeing 10 long years. You’re guaranteeing 1 year all the time. It keeps rolling forward and if you default and there’s a problem, you‘re due a year’s worth of rent, which is a lot better than the remaining term. Sometimes the guarantee is limited to a dollar figure which is fair enough. Write it in there and come to an agreement on how much the guarantee can be. Sometimes it’s a time period like after 24 months or 36 months, that may seems fair based on your personal circumstances, and at that point the personal guarantee expires.
In many areas, your assets are owned jointly with your spouse. If the spouse hasn’t signed the personal guarantee, it’s harder to come after your assets because your spouse didn’t sign and they’re his or her assets also. That would have been another way to protect yourself but you want to check with your attorney on that.
Anyway, that can be a pretty important issue that you need to consider.