Generally, a tenant under a commercial lease is a limited liability company or corporation which has been created by the principal or principals of the tenant for liability or tax reasons. Large, well established, tenants with proven track records may negotiate to stand on their own without personal guarantees. But for smaller tenants, a landlord will more often than not ask for personal guarantees of the tenant’s obligations under the lease from the principals of the tenant. These guarantees can take several forms.
The most common lease guarantee is an absolute guarantee by which an individual, or individuals acting jointly and severally, guarantee all payments and performance by the tenant under the lease. These unlimited guarantees give the landlord the option of pursuing the individual guarantors directly and independently of any enforcement action against the tenant.
Lease guarantees can also be “limited” in a variety of ways depending on the negotiating leverage of the guarantors. For instance, a guarantee can be drafted to be a secondary recourse for the landlord, requiring it first to exhaust remedies against the primary tenant. A guaranty can also be limited as to duration or amount, expiring after a set number of months or years during which the tenant operates without default, or being capped at a certain agreed upon dollar amount. Another form of limited guarantee is commonly referred to as a “good guy guarantee”. This generally involves the guarantors’ agreement to ensure payment in full of the rent for a set period of time following notice of a lease termination while also ensuring the orderly vacating of the premises by a defaulting tenant.
Whether individual guarantees are part of your lease, and if so, what form they will take, will depend on the negotiating strengths of the parties. But whether you are a landlord or a tenant, it is important to know and understand your options. Always be sure to consult with your attorney before committing yourself to any lease arrangement.