Is a Lease Guaranty Necessary for your Commercial Lease?
A lease guaranty is a valuable tool that provides commercial landlords with additional security. This is especially true in the case of leasing to a corporate tenant without sizable assets or an established operating history. A “personal” guaranty requires the personal guarantor (usually a principal or principals of the corporate tenant) to put his or her personal assets on the line should the corporate tenant go bankrupt or otherwise default under the lease. A “corporate” guaranty is one usually signed by a parent or more developed affiliated company. It is a comfort to a landlord to have an extra set of assets to go after should its tenant default. It also follows that a guarantor will be less likely to allow the corporate tenant to default, make risky business decisions or allow the leased space to fall into disarray if he or she knows that to do so will result in the guarantor being personally liable.
Whether your guarantor is another entity or an individual, it is important that you perform the same due diligence with the guarantor as you would with the tenant. With the corporate guarantor, confirm its legal existence. For both a corporate and personal guarantor, confirm its net worth, credit history, address and reputation.
The most preferable type of guaranty is a well drafted unconditional or “absolute” guaranty of payment and performance. This means that upon each default by the tenant, and throughout the lease term, the landlord may proceed immediately against the guarantor for all damages. In the case of a personal guaranty, if the proposed guarantor is married, it is best practice to have that person’s spouse sign the guaranty as well, since in Pennsylvania, the landlord will not be able to obtain a judgment against marital property. On the other hand, you may be willing to have only the originally proposed guarantor sign the personal guaranty if you are comfortable that that person has a significant amount of assets in his or her name.
If need be, there are a number of ways in which a guaranty can be limited. Examples of these limited guarantees are as follows:
- The guaranty could expire after a certain period of time (a time in which you will have a better understanding of how your tenant is doing financially);
- The guaranty could be capped to a specific dollar amount;
- The guaranty can be tied to the tenant’s net worth or gross income;
- The guaranty can step down (the guaranty can be a full guaranty to start with, and after a certain amount of time, if there is no tenant default, it can become a limited guaranty);
- The guaranty can be limited to the cost of the tenant improvements;
- Only specific assets of the guaranty can be attached; and
- It can be a “good-guy” guaranty which guarantees the financial obligations of the tenant through the date that the tenant vacates the leased space or preferably until after the landlord is able to recoup its initial investment (to include free rent, tenant improvement costs and brokerage commissions) and after a tenant has vacated the premises.
In the end, the landlord must balance the need to entice tenants to choose its “product” and at the same time protect itself from rogue tenants. A well-worded guaranty is just one of the many protections that the landlord should utilize to accomplish this goal. If you have questions about guarantees, or about commercial leases in general, please contact Shari Hunn.