Personal Guaranties on Small Industrial Leases: What's Negotiable

Why landlords ask

Understanding the landlord's reasoning tells you what they will actually concede.

A five-year lease on a small suite represents a substantial total obligation. If the tenant entity is a newly formed LLC with no assets, the landlord's remedy on default is against a shell. They cannot recover unpaid rent, they cannot recover the cost of any buildout they funded, and they carry vacancy and re-leasing costs.

• The guaranty is not the landlord trying to take your house. It is the landlord asking for a real party behind the obligation, because otherwise the economics of funding buildout and committing space to an unproven entity do not work.

Which is why the concessions that succeed are the ones that keep a real party on the hook while limiting how far that exposure runs.

The five terms worth negotiating

1. A cap on total exposure. The single most valuable ask. Instead of guaranteeing the full remaining term, cap the guaranty at a stated sum or a rolling number of months of rent. A rolling twelve-month cap, meaning your maximum exposure at any point is twelve months of rent rather than the balance of the term, is a structure landlords do grant, and it is dramatically less frightening than an uncapped guaranty on a five-year lease. Ask whether the cap applies to renewals and extensions too, and get that in writing.

2. A burn-off. The guaranty reduces or terminates after a period of good payment history. For example, stepping down after year two and releasing after year three, provided no default has occurred. The landlord's risk is concentrated early, so this is a reasonable trade and it is frequently accepted.

3. Release on assignment. If you sell the business and the landlord approves the assignment, you should be released. Without this, you can remain personally liable for a business you no longer own. Landlords who will not release outright will sometimes agree to release on assignment to an assignee of equal or better financial standing.

4. Who signs. If the business has multiple owners, push for several rather than joint and several liability, so each owner is responsible for their share. Also resist spousal guaranties where they are not legally required.

5. Notice and cure before the landlord can call. A requirement that the landlord notify the guarantor of a default and allow an opportunity to cure before enforcing. This prevents you discovering the problem when a judgment arrives.

Related asks that reduce the same risk

• A "good guy" clause. Limits guarantor liability to amounts owed through the date you vacate and hand back the space, provided you give proper notice and leave it clean. Common in some markets, less so in Michigan industrial, and not always granted. Worth asking.
• A larger security deposit instead of a guaranty. Some landlords will trade one for the other, or reduce the guaranty in exchange for more cash up front. If you have the cash, this converts an open-ended personal obligation into a known number.
• A shorter initial term with a renewal option. Less total obligation to guarantee. The trade is usually a higher rate.
• A letter of credit. More common with larger tenants and worth raising if your bank will issue one.

What to read before you sign one

• Guaranties are short documents that do a lot of work. Check:

Whether it covers only rent, or also damages, legal fees and costs of re-letting

Whether it extends automatically to renewals, extensions and expansions

Whether it survives assignment of the lease

Whether the landlord must pursue the tenant entity first, or can come straight to you

Whether it waives defenses you would otherwise have

What happens on a lease amendment you did not sign

• That last one matters more than it sounds. Some guaranties bind the guarantor to future amendments made between landlord and tenant without the guarantor's consent.

If you are asked and you are uncomfortable

Say so plainly and early, at letter of intent stage, and propose the alternative you want. "We can sign a guaranty capped at twelve months of rent, burning off after year three with a clean payment history" is a proposal a landlord can work with. "We don't do guaranties" from an unproven entity usually ends the conversation.

• And get a lawyer to read it. This is a personal obligation that can outlive the business. It is one of the few places in a small lease where an hour of legal time is clearly worth the cost.

At our properties

We negotiate guaranty terms regularly, including caps on exposure. Raise it at letter of intent stage with a specific proposal and you will get a specific answer.

Frequently asked questions