Commercial leasing is an ever-evolving process in which the deposit is high and the risk is high. Landlords often require a personal guarantee when leasing commercial space to new businesses. Indeed, startups are often more likely to fail than established businesses. By asking for a personal guarantee, owners can be sure that they will always be paid even if the business fails. Read here about how to get out of a Personal Guarantee on Commercial Lease.
In this article, we’ll explore six possible ways to get rid of personal warranties in commercial leases.
What is a personal guarantee?
A personal guarantee is a contract between a tenant and a landlord in which the tenant agrees to be personally responsible for paying the rent in the event of business bankruptcy. This means that if the business is unable to pay the rent, the landlord can sue the tenant for money. Take a look at what a commercial lease looks like in Florida.
How to get out of a Personal Guarantee on Commercial Lease?
There are five ways you can get rid of a personal guarantee in a commercial lease. There are:
1. Subleasing the space to another tenant
Subletting the space to another tenant is often the easiest way to secure privacy, but finding a qualified tenant can be very difficult. You will also need to get your landlord’s approval before proceeding.
This method comes with an additional role, as you are responsible for dealing directly with your sub-tenants and managing the property yourself. However, rent payments made by your tenants make it easy for you to meet your obligations. Check out this site that provides more information on how to operate as a property manager and your tenant requirements, should you decide to go this route to get out of a personal guarantee commercial lease.
- Your sub-tenant provides the money you use to pay rent.
- Your landlord may refuse to accept this and does not need to agree.
- Additional roles when you have to take on property management.
2. Assigning the lease to another party
Assigning a lease to another party is often easier than subleasing it, but you will still need to find a qualified and approved replacement by the landlord. This option can also be expensive, as you may have to pay a transfer fee.
However, this does not relieve you of the rental obligation. If your new tenant misses payments or breaks the agreement, you are still responsible.
- Finding tenants is easier than subleasing.
- It is quite expensive as you may have to pay a transfer fee.
- If the new tenant doesn’t pay, you are still responsible.
3. Use a break clause
Some leases will always include a break-out clause. This provision allows the tenant or landlord to withdraw from the lease due to various circumstances. For this, you will need to review the terms and conditions of your tenancy agreement to see if this provision exists. If so, the stated deadlines and conditions must be strictly observed.
- In the event of a change in your circumstances as a tenant, this provision will make it easier and smoother for you to waive your personal guarantee on commercial lease with the lessor.
- Failure to comply with the terms and conditions set forth may render the break-out provision void and the lease may continue.
4. Renegotiate the lease contract
If you have proof that you have made a profit and a steady income for more than a year, you can renegotiate the lease with the landlord. As long as you’ve paid your rent on time during this period, your landlord should be prepared to negotiate the terms of a contract that requires you to be the personal guarantor. However, it’s important to talk to an attorney first and find out what your options are and how to proceed.
- With substantial income, this route is best when it comes to getting rid of a personal guarantee on commercial lease.
- Even with documents showing the company can pay rent without security, your landlord may disagree. This may force you to sue and go to court. This ultimately means that the relationship between the tenant and the landlord has soured.
5. Have a personal guarantee insurance
While this is another way to get rid of a personal guarantee on commercial lease, it is important to note that it is quite expensive. The value of the insurance depends on the coverage purchased. Usually, this is about 70% of the insurance company’s net liability. However, having insurance means that some of your assets are covered if you are threatened by a company going into liquidation.
- Your property is insured in the event of liquidation.
- It is quite expensive to implement.
- The value of the insurance may cover only some properties.
6. Breaking the lease
Breaking a contract is usually a last resort, as it can damage your credit and reputation. This option should only be considered if you absolutely cannot continue to pay your rent. If you decide to end your lease, make sure you have a solid plan in place for finding a new home.
This option is only interesting if you can’t keep paying your rent anyway.
In most cases, your creditworthiness is damaged.
In general, a personal guarantee on commercial lease can be beneficial to landlords, but it can be a burden on tenants. Tenants can handle it in a number of ways, but it can take a bit of work. To summarize, the main points for getting out of personal bail are:
- For new sub-tenant
- Negotiate the lease agreement
- Transfer of lease contract to new parties
- Use break clauses to your advantage
- Get personal insurance coverage
- Break the contract