Landlords often require personal guarantees to a lease. Don’t be fooled by terms that may not be widely used. Because the landlord has a requirement for a personal guarantee it does not mean that you cannot negotiate some variation of that guarantee. Some of the common variations are:
1. Perhaps the “rolling guarantee” which likely means that the landlord will offer you a personal guarantee that will be set for a certain portion of the lease term. The conditions to eliminating the guarantee may be varied. However, this will be based on your showing that you are a credit worthy tenant that can be trusted to keep the terms of your lease, as that is the major need of a property owner. The landlord will want to know that you have and will continue to have a viable method of paying the rent from the business that is leasing the space. Until such time the landlord will want to be able to attach assets that you may personally hold. Be sharp, be honest, have good credit, have an proven source of business income and be in a business that will not be greatly affected by economic turns. If so, you can likely negotiate a way to “roll out of your personal guarantee”.
2. If you have good business resources you could also ask that a letter of credit be issued by your financial institution for a set period and a fixed dollar amount. This letter of credit would only be called upon if you abrogated the responsibilities of your lease. This may cost 1% or so per year to maintain, but it could be better than a personal guarantee. You would want the business to qualify for the letter of credit, otherwise it would not be any better than the personal guarantee and would have the extra annual cost connected to it.
3. You may satisfy a landlord by putting up a large front end deposit equivalent to several months rent, rather than the personal guarantee. If the landlord is able to utilize this deposit, rather than holding it in a trust account, it may be an incentive to him to take that instead of the personal guarantee. This is saying to the landlord, “if my business defaults on the lease, you have “x” number of months to release the space, and if the space is good for business you surely can get it released during that time.”
There are other creative ways to avoid or “roll out of” a personal guarantee. Be sure that you seek good legal and commercial broker transaction advice. Good professional representation will always cost less and save more. Remember the person who represents himself may indeed have a fool for a client”.
Onward and upward Steve….. Rob Baird, CA RE License #544165 (One of the oldest, active licenses in CA) 951 515-5855 Email: firstname.lastname@example.org
Apr 19, 2011