Over the past few months, I have had a few different cases where my client, an incorporated small business, either needed help with drafting (landlords) or negotiating (tenants) a commercial lease agreement. In each case I try to impose, or conversely prohibit, a personal guarantee being a condition in the lease. It is so standard to see a personal guarantee included in a lease that I am always amazed when it is absent. The exception, rather than the rule.
Most personal guarantees in commercial leases are the result of the landlord trying to minimize the inherent risks involved in renting property to a small business. Since most small businesses have few, if any, liquid assets, the personal guarantee creates an extra level of protection for the landlord and helps assure that the lease will be fulfilled. Quite simply, the landlord is trying to make the agreement as secure as possible.
When a personal guarantee is agreed to it makes the individual signing the guarantee personally liable under the lease. This is prudent for a landlord just in case the tenant goes out of business, files for bankruptcy or otherwise can’t meet its financial obligations. It is also a slick way to sidestep the personal liability shield that would otherwise insulate the owners of an incorporated business from this liability.
A savvy tenant, with something to offer (even services or labor) can sometimes negotiate its way out of the requisite personal guarantee. But a sophisticated landlord will insist upon something else of value be put at stake instead. You can use UCC filings that cover a tenant’s business equipment, other assets, or even personal property, and designate the landlord as the secured party. It is also possible to successfully omit personal guarantees under the right conditions. These situations may exist where the rental property is unique, yet fit for a tenant’s particular use, when the tenant has previously honored a lease with the same landlord and, of course, when the landlord has no concerns about the tenant’s solvency.
After all is said and done, a personal guarantee won’t be worth more than the paper it is printed on unless the guarantor is financially viable. This brings me to the “moral of the story” got from an article I read today. It demonstrated a perfect example of a landlord doing everything possible, albeit somewhat after the fact, to try to make sure he would be able to collect the losses allegedly suffered from a default in a commercial lease. This applicable law in the case is technically distinct from a personal guarantee and is due to the particularities of partnership law (and demonstrates a darn good reason to operate as a corporation or LLC rather than as a partnership).
So, yesterday, the Am Law Daily reported on a case where a landlord is currently suing 450 attorneys, who were formerly partners at a large Manhattan law firm. In the lawsuit, the landlord alleges all of the partners are personally liable for the default in a commercial lease involving six floors of a high-rise office tower.
The lease runs through 2020 and, at one point in time, the landlord believed the default resulted in a loss of more than $45.45 million. Although the landlord only claims about $1.6 million damages now, there is still a lesson to be learned. That lesson is that you can never go overboard when trying to tie people personally to a lease in order to secure it.
You can read more the whole article here: http://www.americanlawyer.com/PubArticleALD.jsp?id=1202621080749&Deweys_New_York_Landlord_Sues_450_Former_Partners#ixzz2g9PTUBqJ
- How Landlords Can Steer Clear of Bad Tenants (unclesamjia.wordpress.com)
- Kevan Carrick: Landlords must innovate to survive (thejournal.co.uk)
- The Basics of Commercial Lease Agreement (sonai0899.wordpress.com)