Personal Guarantee Alternatives and How to Reduce Your Liability

Generally, a Landlord is going to ask for some sort of guarantee whether you have three or thirty locations. If you’re a Tenant, it’s probably safe to say that you don’t jump out of bed excited to guarantee a Lease. The good news is, there are several alternatives to a blanket personal guarantee, and there are ways to limit personal liability.  

What is a personal guarantee?

In a commercial real estate setting, a personal guarantee is a legal commitment made by an individual—typically the Tenant or their financial partner—to fulfill lease obligations using their personal assets if the primary entity (Corp or LLC) fails to meet its financial responsibilities.

What are some alternatives to personal guarantees?

• Corporate Guarantee: Is where the parent company is responsible for the tenant’s performance of the Lease.  

• “Burn Off”: A burn off  is where the guarantor’s liability compresses or is alleviated after a period of time. The time of the burn off can vary based on what was negotiated, and are generally subject to Tenant not being in default of the Lease during said period. Both a personal and a corporate guarantee can burn off.  

• Tenant Improvement (TI) / Lease Commission (LC) Guarantee: If your company is strong enough, sometimes Landlords will agree to a Tenant Improvement/Leasing Commission Guarantee. For example, if the Landlord’s leasing commissions and Tenant improvements total $100k, they will cap the guarantor’s liability at $100k. Sometimes this is for the term of the Lease, and other times once Landlords receive $100k the guarantor will be released.  

• Limited Guarantees: Similar to a TI/LC Guarantee, a limited guarantee is where the guarantor is only liable for a certain dollar amount. For example, “The guarantors maximum liability pursuant to this guarantee shall be limited to three (3) years minimum guaranteed rental, common area charges, tax and insurance reimbursements at the time of the default”.  

What guarantees should a Tenant try to avoid?

• Unlimited Guarantee ​​An unlimited guarantee is where the Guarantor is liable for the full amount of the debt with no cap meaning if your Lease totals 10 years and $5M, you are on the hook for the full amount of the lease.  

• Joint and Several Guarantee A joint and several guarantee is when there are multiple guarantors on a Lease, and each can be held fully responsible if others don’t pay. While you may not be able to control if your landlord requires one of these, you can control who your business partner is and we urge you to pick a good one or else you could get stuck with the entirety of the lease bill and unfortunately, we’ve seen it happen many times.  

Conclusion

For retail Tenant, a guarantee is something that is likely to come up in every new site, however with the right structure your personal liability can be either minimal or non existent.  

Let us know if you have any questions or want more information regarding any of the above structures.