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 retail space to new businesses. Indeed, startups are usually more likely to fail than established businesses. By asking for a private contract, owners can be sure they will always be paid even if the company 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 case of business bankruptcy. If the business cannot 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 to get rid of a personal guarantee in a commercial lease. There are:
Subleasing the space to another tenant
Submitting the space to another tenant is often the easiest way to secure privacy, but finding a qualified tenant can be 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 from 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.
Pros
- Your sub-tenant provides the money you use to pay rent.
Cons
- Your landlord may refuse to accept this and does not need to agree.
- Additional roles when you have to take on property management.
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. You are still responsible if your new tenant misses payments or breaks the agreement.
Pros
- Finding tenants is easier than subleasing.
Cons
- It is expensive as you may have to pay a transfer fee.
- If the new tenant doesn’t pay, you are still responsible.
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 requirements must be strictly observed.
Pros
- 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 guarantee on a commercial lease with the lessor.
Cons
- Failure to comply with the terms and conditions may render the break-out provision void, and the lease may continue.
Renegotiate the lease contract.
If you have proof that you have made a profit and a steady income for over 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 contract terms that require you to be the personal guarantor. However, it’s essential to talk to an attorney first and determine your options and how to proceed.
Pros
- With substantial income, this route is best for getting rid of a personal guarantee on a commercial lease.
Cons
- Your landlord may have differing views even with documents showing the company can pay rent without security. This may force you to sue and go to court. This ultimately means the relationship between the tenant and the landlord has soured.
Have personal guarantee insurance.
While this is another way to get rid of a personal guarantee on a commercial lease, it is essential to note that it is pretty 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.
Pros
- Your property is insured in the event of liquidation.
Cons
- It is quite expensive to implement.
- The value of the insurance may cover only some properties.
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 cannot continue paying your rent. If you decide to end your lease, ensure you have a solid plan for finding a new home.
Pros
This option is only attractive if you can’t keep paying your rent anyway.
Cons
In most cases, your creditworthiness is damaged.
Summary
In general, a personal guarantee on a commercial lease can benefit landlords, but it can burden 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
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