What is a personal guarantee for a restaurant lease?
A personal guarantee is a security instrument whereby the person signing the guarantee-“Guarantor” remains liable for the monetary obligations of the restaurant lease.
If you operate your business as a corporation or limited liability company and wish to lease commercial real estate, the property owner will often require a personal guarantee.
Why should you be concerned about signing a guarantee?
Many business owners do not give much thought to signing a guarantee. As an honest person you intend to pay your rent during your tenancy. But what if you assign the lease or sell the restaurant?
A personal guarantee will typically remain in effect for the entire term of the lease and any options if exercised. With typical lease terms of five to ten years, you can remain liable years into the future for a restaurant you no longer own.
The following is a true story. A franchisee with multiple stores sold one of his restaurants and assigned his lease to the new owner.
Approximately three years later he was notified by the landlord that the restaurant had closed and he was liable for rent.
He had signed a personal guarantee for a restaurant lease with a term of 10 years.
How do you protect yourself when signing a personal guarantee?
There are different methods to reduce your risk exposure with a personal guarantee. Here are a few ways:
•Limit the period of time
Reduce the period of time that you remain liable. If you are signing a five year lease, limit the personal guaranty to the first 24 or 36 months.
•Limit the guarantee to a fixed amount of money
Reduce the total liability to the lowest fixed dollar amount. For example the maximum personal guarantee shall be limited to an amount equal to twelve months rent.
•Increase Security Deposit
If you have the capital available increase the security deposit. For example, a landlord may agree to a security deposit equal to 3, 6,
or 9 months rent. Many landlords will agree to burn off the deposit over time if you pay rent on time.
If you are asked to sign a personal guarantee for a business lease, knowing what is involved in this guarantee and being able to negotiate terms can help you minimize your personal financial exposure in this situation.
MG Brokers are not attorneys and can only make suggestions and recommendations. However, we are creative and can work with your attorney to ensure the best possible outcome for all parties. Please contact an attorney to review all documents before signing them. If you need a corporate attorney, we can give you several referrals.