What’s a Personal Guaranty?

In commercial leasing landlords will sometimes require a prospective tenant to personally guarantee the lease. This means that the guarantor(s) will be personally responsible for the tenant’s lease payments. In the case of default, the landlord can go after the personal assets of the guarantor(s).

Why would anyone agree to put their personal assets on the line? Sometimes a tenant has no choice. Personal guaranty requirements have increased dramatically since 2008 as a result of the Great Recession. They apply primarily to new businesses and reflect the landlord’s estimation of risk regarding the tenant. The terms governing personal guarantees can be negotiated and limited in both scope and size. An increased security deposit can also sometimes be negotiated in place of a personal guaranty, but that means having to put down cash, capital that might otherwise have been used to grow the business.

Perhaps the best and easiest comparison is a bank lending someone money. The bank will look for collateral to secure the loan. In the event of default, the bank can foreclose on the collateralized asset. Like a bank the landlord is loaning the use of their property to the tenant in exchange for rent payments. The landlord incurs a similar risk and thus will require certain assurances that their damages will be mitigated in the event of default.

While it can be a bit scary to put one’s personal assets on the line a personal guaranty is only a piece of paper if the tenant lives up to the terms of the lease. Both parties are entering into an agreement and simply need to do what they said they would do. Also landlords are generally required by law to mitigate their damages in the case of a tenant default. Always have your attorney review the terms of a personal guaranty to ensure that they comply with the laws in the subject jurisdiction.

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