Shanu Singh Guliani

Till Death Do Us Part
March 13, 2007

You just located the perfect space…the size is right, there’s tons of foot traffic, plenty of parking, and the rent is unbelievably affordable…but wait—what is the lease like? What if the business was to fail and I needed to break the lease?

I learned one of the most crucial aspects of the lease was the personal guarantee. If you are a new business, expanding, or not a national tenant…regardless of your impeccable personal credit, you may have no other option then to have to sign a personal guarantee.

In a nutshell, if you go bankrupt, default on your lease, or DIE (in this case "till death do us part" doesn't hold true) you still owe the landlord the amount you personally guaranteed the lease for. Essentially, this makes you personally responsible for the rent and means that the corporation doesn’t shield your personal assets.

How long should I guaranty my lease?
Ans: The shortest amount of time possible. If you don't have to guaranty your lease jump up and down.

How long do Landlord’s require you to guaranty a lease?
Ans: Landlords will try to get you to guaranty the space for the initial lease term. For example, you are given an initial five-year lease term and two five-year options to renew…well most landlords will require you to guaranty the lease for the entire initial lease term. Scenario…business is going bad you need to cut your losses—whether you leave in 1, 2, or 3 years you will have to pay the remainder of the rent (because you guaranteed it for five years total).

What should I do?
Ans: One approach is to offer to guaranty the lease only up to a maximum amount. Say, 12 months worth of rent (if you can get two or three months…more power to you). Don’t get yourself into a mess by signing a 10 year guaranty…well unless you have the funds to back it up incase something goes wrong.
Another tactic…many landlords provide tenants a construction allowance (TIA=Tenant Improvement Allowance) for up-fitting. For example, a new construction building will only have the sprinkler heads, demising walls, and the plumbing done…you will be provided an allowance for your “cold dark shell or gray shell.” TIA is usually a dollar amt per sq ft (maybe you get $35 a sq ft…bargain for as much as you can get…and the space is 2000 sq ft, your landlord will give you $70,000 in TIA). Most landlords want to acquire their money back ASAP so try to guaranty the lease for that amount…it is usually a year to a year and half’s worth of rent. Alternatively, you can negotiate to burn those dollars off…each time you pay rent it is subtracted from the total amount of TIA dollars given to you. Therefore, if you were given $70,000 in TIA and your first months rents was $5000…you now owe the landlord $65,000 if you were to break the lease.

Hope this helps. Be aware…one of the biggest mistakes you can make is to sign the landlord's lease form without first having it reviewed by an attorney (but it’s always good to do some reading up on your own too).

Posted by Shanu Singh Guliani on March 13, 2007 | Comments (0)