When entering into a commercial lease, the Landlord often requires a personal guarantee from the business owner, even if they have formed a corporation or LLC, and may refuse to rent the space without one. This means that the guarantors will make the lease and other payments if the business fails. Landlords often ask for a personal guarantee from start-ups and other small businesses. Read very carefully the language about personal guarantees and how long they last and what happens if the business fails and can’t fulfill the remaining payments on the lease.
You may wonder why a landlord wants a personal guarantee. When landlords have to pay for a large amount of tenant improvements (i.e. constructing the space to your specifications), personal guarantees are usually required. If you are a small business with plans to grow or are unsure of the future, limit your personal exposure. Designing the perfect office space shouldn’t be your highest priority. Find practical space with a reputable landlord.
Statistics show that only 50% of all new small business start-ups will be operating in 5 years. If your landlord requires a personal guarantee, negotiate to limit the term of the guarantee or best yet, find a landlord who doesn’t require one, or find a really good broker who can present you to the landlord in a way that makes them feel as if you would be an amazing new, money-making asset to their center.