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 a business fails and defaults on its lease payments, then the 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 guarantees (sometimes spelled as “personal guaranty”) from business owners, regardless of their company’s structure. And even if a business owner has a strong record of repayment and their business is in the black, a landlord may require a time-limited guarantee in order to reduce their own financial risk.

If the business owner provides a personal guarantee, commercial leases might be more attainable for them, but understandably, most people don’t want to take that approach. Offering a personal guarantee affects the owner’s personal liability, even if their company structure provides personal liability protection (like a limited liability company or corporation). Here are some options business owners can pursue to get a commercial lease while protecting 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, most commercial leases are complex and involve extensive negotiation. It’s crucial for business owners to understand the intricacies of these agreements to help ensure they’re securing the best deal for their 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 owners understand their financial obligations, avoid unexpected costs, and ensure that the lease aligns with their business needs.

Types of Commercial Leases

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

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 makes base rent payments 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 a landlord is demanding a guarantee doesn’t mean that a business owner can’t negotiate a creative, mutually beneficial lease.

Request a time-limited guarantee. Business owners can ask their 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 (and by extension, the tenant defaults), so it’s entirely reasonable to request that the personal 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 the guarantor definition guide for more information on this term). This protects the landlord from “cut-and-run” defaulters. If a business is failing, or it needs need to relocate to another space, the landlord agrees not to enforce the guarantee, provided that the owner pays their rent until the agreed-upon departure date.
It’s wise to ask that the guarantee be waived upon transfer of the lease. If an owner sells their business to a new operator, or if the landlord transfers ownership or management of the space to a new lessee, it’s preferable that the owner isn’t stuck guaranteeing anything.

Key Terms to Know

When negotiating a business lease, it’s essential for a business owner to understand the key terms and conditions to protect their 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 the 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. If the space isn’t in good condition when the business leaves (or the company is unable to pay its outstanding rent), the deposit could be retained by the landlord.
Lease Duration: The length of time the tenant has the right to occupy the property. Lease terms can vary, so it’s important for owners to choose a duration that aligns with their business plans. Often, these sections provide for renewing the lease later on, if desired.
Tenant Improvement Allowance: A certain amount of money provided by the landlord to cover the cost of improvements to the property. This allowance can help a business customize the space to meet its specific 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 an owner’s personal finances.

Resolving Disputes

Disputes can arise during the term of a commercial lease, and it’s helpful for business owners to prepare a plan to resolve those disputes before they come up. Common disputes include disagreements over when and how the tenant pays rent, property use, and lease termination. Here are a few strategies owners can use to resolve these issues (somewhat) promptly:

Negotiation: Open communication with the 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, a business owner might hire a commercial real estate attorney. These professionals can help provide the expertise needed to protect the owner’s interests and navigate the legal aspects of the dispute.

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

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 since the company has little or no assets of its own. But if a business has a demonstrable record of repayment, adequate capital, and a strong balance sheet, the owner may be able to convince a commercial landlord to waive the guarantee entirely.

Typically, a landlord will ask the business to offer a retainer or a larger security deposit in lieu of a personal guarantee. The downside of this approach? This retainer would tie up cash that could otherwise accumulate interest or be used for capital improvement projects.

Business owners would be wise to keep their balance sheet in mind and make sure that a cash deposit will not undercapitalize the 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, peace of mind is invaluable for an owner. Owners need to be able to objectively appraise their business, make decisive decisions, and stand behind those choices.

Seeing clearly and acting with certainty will always be more difficult when an owner has their personal wealth and personal assets (and, by extension, the financial security of themselves and their loved ones) are at stake. In the end, an entrepreneur 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 owners comprehend the fine print.
Negotiation Skills: An attorney can negotiate favorable terms on an owner’s behalf, ensuring the lease aligns with the business’s needs.
Representation: During lease negotiations, having an attorney represent the company’s interests can provide peace of mind and ensure a fair outcome.
Dispute Resolution: If disputes arise, an attorney can offer guidance and representation, helping both parties 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, helping their business thrive 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. For specific questions about any of these topics, seek the counsel of a licensed professional.