Six possible ways of getting out of a personal guarantee on a commercial lease.
Commercial leasing is an ever-evolving process in which the stakes are high, and the risks are great.
Personal guarantees are often required by landlords when renting commercial space to new businesses. This is because businesses that are just starting are more likely to fail than established businesses. By requiring a personal guarantee, landlords can be sure that they will still get paid even if the business does not succeed.
In this article, we’ll explore six possible ways of getting out of a personal guarantee on a commercial lease.
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 the payment of rent if the business fails. This means that if the business is unable to pay rent, the landlord can come after the tenant for the money. Take a look at what a Florida commercial lease agreement looks like.
This website expands on what a personal guarantee is and the recent demand for it when leasing commercial property.
How to get out of a personal guarantee on a commercial lease
There are five ways you can use to get out of a personal guarantee on a commercial lease. There are:
1. Subleasing the space to another tenant
Subleasing the space to another tenant is often the simplest way to get out of a personal guarantee, but it can be difficult to find a qualified subtenant. You’ll also need to get approval from your landlord before proceeding.
This way comes with an extra role as you have to take up responsibilities of dealing with your subtenant directly as well as managing the property yourself. However, the rent payments done by your tenant mean you can meet your obligations easily. A Look at this website provides more information on how to act as a property manager and the requirements of your tenant, should you decide to go with this way of getting out of a personal guarantee.
- Your subtenant provides the money you use to pay for the rent.
- Your landlord may refuse to accept this and they are not obligated to say okay to it.
- Extra roles as you have to take up managing the property.
2. Assigning the lease to another party
Assigning the lease to another party is often easier than subleasing, but you’ll still need to find a qualified replacement and get approval from your landlord. This option can also be expensive, as you may be required to pay an assignment fee.
However, this does not exempt you from tenancy liabilities. Should your new tenant miss any payments or break the agreement, you are still required to take responsibility.
- It is easier to find a tenant than when subleasing.
- It’s quite expensive as you may have to pay an assignment fee.
- Should the new tenant not pay, you are still liable.
3. Use a break clause
Some leases will always include a break clause. This clause allows either the tenant or landlord to get out of the lease due to various circumstances. For this, you will need to go through the terms and conditions of your lease to see if there is this clause. If it is there, the time limit stated and conditions must be strictly followed.
- In case your circumstances as a tenant change, this clause makes it easier to let go of the commercial lease without hurdles with your landlord.
- Non-compliance with the stated terms and conditions may make the break clause non-effective and the lease may continue.
4. Renegotiate the lease contract
If you have proof that you have been making consistent profits and revenues for over a year, you can renegotiate the lease contract with your landlord. As long as you have paid your rent on time for this period, then the landlord should be willing to negotiate the terms of the contract that require you to be a personal guarantee. However, it is important to talk to a lawyer beforehand and know what your options are and how to go about this way.
- With consistent income, this way is the best way when it comes to get out of a personal guarantee to a commercial lease.
- Even with documents showing the business is capable of paying for the lease without the need for a guarantee, your landlord may not agree to this. This may force you to take legal action and go to court. This eventually means that the relationship between tenant and landlord is soured.
5. Have a personal guarantee insurance
Even though this is another way to get out of a personal guarantee on a commercial lease, it is important to note that it is quite expensive. The value of the insurance depends on the coverage taken out. Usually, it is about 70% of the insurer’s net liability. However, getting insurance means that some of your assets are covered should you be at risk from a liquidating company.
- Your assets are covered in case of liquidation.
- It is quite expensive to undertake.
- The value of the insurance may only cover a few assets.
6. Breaking the lease
Breaking the lease is usually a last resort, as it can damage your credit and reputation. This option should only be considered if you absolutely cannot continue paying rent. If you do decide to break your lease, make sure you have a solid plan in place for finding new housing.
- This option is only great if you cannot continue to pay for your lease at all costs.
- In most cases, your credit reputation is damaged.
Overall, personal guarantees can be beneficial for landlords, but they can be a burden for tenants. There are a few ways that tenants can get out of them, but it may require some effort. To sum up, the key points of getting out of a personal guarantee are:
- Subletting to a new tenant
- Renegotiating the lease agreement
- Assigning the lease to new parties
- Using a break clause to your advantage
- Getting a personal guarantee insurance
- Breaking the lease