Negotiating Personal Guarantees in Commercial Leases
June 3, 2014
The economic collapse of the last decade created many significant changes in the business landscape. In recent years, with tenant defaults having skyrocketed, the frequency of personal guarantees attached to commercial leases has risen significantly. Personal guarantees may be customized in a number of ways to ensure their terms are reasonably acceptable to both landlord and tenant.
First, it is vital to note that, under New Jersey law, all the terms of the personal guarantee in your commercial lease must be in writing. Any proposed guarantee provision or negotiated modification must be recorded on paper to be valid and enforceable. Generally, the person who signs a commercial lease on behalf of a tenant corporation is an officer of that corporation. If the tenant business closes then, without a personal guarantee, the landlord’s only recourse is against the failed business. The officer who signed the lease has no individual legal obligation for that debt.
Landlords may also perform financial background reviews of their tenant’s officers and insist that the individual who makes the guarantee is someone who the landlord is certain has the financial ability to pay should the landlord need to enforce the guarantee.
Tenants, on the other hand, while potentially no longer able to remove personal guarantees from inclusion in their leases, may be able to negotiate for terms that limit the scope or impact of a guarantee. One option might be inserting a time limitation on the guarantee. Establishing a history of timely rent payment and the tenant’s business stability and success over a period of years might give the landlord the confidence to continue without the guarantee. For example, on a 10-year lease, the personal guarantee might only apply for the first three years.
Another possible limitation is what’s called a “good guy” guarantee. This type of guarantee is in effect for as long as the tenant is in possession of the property and protects landlords from tenants who simply vacate early with no notice. In this arrangement, the landlord agrees not to pursue the individual guarantor, even though the tenant corporation has left the space before the end of the lease term, if the tenant provides the landlord with timely advance notice of its intent to leave, leaves the property in good condition, and is current on all rent owed up to the agreed-upon date.
Additionally, the tenant may ask for a guarantee that is waived upon transfer. This means that, if the tenant corporation is sold to new ownership, the guarantor’s personal responsibility expires.
Negotiating a commercial lease involves a wide array of terms and a myriad of options for customizing each term. For quality advice and representation as you negotiate your commercial lease, contact the real estate attorneys at Samuel C. Berger, P.C. Our New Jersey real estate attorneys can help you identify your needs and goals and help put together a plan for obtaining a lease that meets those business objectives. Reach us online or call (201) 587-1500 or (212) 380-8117 to schedule your free, confidential initial consultation today.
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