My landlord wants me to sign a personal guaranty...should I?
My brother, a chef, has been looking to open his own place for a
number of years now. He tells me that when he finds the perfect space,
he is going to jump on it. If that happens, I'm sure that I will get a
call from him asking if I have time to review his lease. He will tell
me that it's the perfect space and that I need to take only a "quick
look." He also will probably tell me that, because he's taken my advice
and set up his business as a limited liability entity, the landlord
wants him to sign a personal guaranty. He will want to know what that
means and whether he should sign it. Here's what I'll tell him:
Landlord POV
A
personal guaranty of a lease is a promise from a "guarantor"
(typically, the owner of the business) that, in the event of a breach
of the lease, the guarantor will make good on the tenant's promises.
For example, if the tenant fails to make rent, the landlord can sue the
guarantor to collect it. If successful, the landlord will get a
judgment against the guarantor and be able to execute against the
guarantor's personal assets to collect. So much for a limited liability
entity, right?
But that's the point. Many landlords are not
going to want to lease space to a start-up restaurant with no track
record of success. If the restaurant fails, the landlord is going to be
left with space that is built out like a Mediterranean castle ("Nice,
but not stuffy," says my brother). Suing the restaurant won't work
because it's gone out of business. On the other hand, suing my brother
might work. He owns a house and has various investments. By suing to
enforce the guaranty, the landlord can force my brother to liquidate
his assets to pay up. The only defense to the landlord's action is
likely to be personal bankruptcy. This legal route would be rough for
my brother, but it also can be bad news for the landlord: joint
business/personal bankruptcies can tie up a landlord's space and afford
him little prospect of getting paid, or they can trigger a long wait
for restoration.
Tenant's Option
So
what are the options? I will suggest to my brother that he try to
negotiate a good guy lease guaranty with the landlord. A "good-guy"
guaranty is different from an unlimited personal guaranty in that the
guarantor's liability is nullified if he delivers the vacant space back
to the landlord and pays the rent due up to the date of delivery. If
the tenant doesn't vacate, the guarantor can be sued personally. Once
the landlord gets the space back, however, the guarantor is off the
hook.
The benefits to my brother are obvious, but how does the
landlord profit? If landlords are able to insist on–and get–personal
guaranties from tenants, why would they ever accept a "good guy"
limitation? The simple answer is that they probably won't. This is
where my brother gets really mad at me. He has found the "perfect"
space and he does not want to hear me tell him about the risks. A smart
tenant will not commit emotionally to a space until an acceptable lease
has been signed. Negotiating such a lease can be done quickly, but it
also must be done intelligently.
If you are reading this column
and you are not my brother, be sure to review your leases and
guaranties with your real estate attorney. A space isn't "perfect" if
your lease terms are not acceptable. In addition to the "good guy
limitation" I discuss here, guaranties can be limited in many other
ways, including a specific dollar cap or length of time. The best
negotiating strategy will depend upon the facts of your situation and
the relative bargaining strength of the parties. Remember: Don't be
afraid to walk away.
John Benazzi is an attorney with the law firm of Davis Wright Tremaine LLP
in Portland, Oregon. He specializes in all aspects of real estate
transactions and has represented buyers, sellers, borrowers, lenders,
tenants, and landlords in connection with the sale, financing, and
leasing of commercial real estate.