How to Handle Personal Guarantees When Leasing Office Space

personal guarantees in office leasesUnless your company is a highly successful, public company most landlords will require that you sign some sort of personal guarantee when leasing office space.  Before you sign anything make sure you understand what you are guaranteeing.

Signing a personal guarantee makes you liable for 100% of the lease payments.  In the event you default on the lease or go out of business you will be personally responsible for any remaining rental obligations.  For example If your business goes bankrupt in year 2 of a 5 year lease and you don’t pay rent you will personally be liable for the remaining 3 years of the lease obligation.  So make sure you read the fine print.

So What is One Way to Limit Your Risks?

Landlords typically require personal guarantees on office space rentals when they have to spend a lot of money on tenant improvements, AND/OR if they perceive your company financials to not be that strong.  If you are asked to sign one always try to negotiate limits on what you are personally on the hook for.  For example you can negotiate to only personally guarantee the landlords cost of doing the deal (e.g. tenant improvements, commissions, other leasing costs).  In this case you would ask to personally guarantee the unamortized costs.  So if the total costs were $50,000 and you signed a 5 year lease that would be $10,000 per year.  If you defaulted in year 2 then you would owe the landlord $30,000.

$30,000 is still a lot of money, however it’s far less than having to pay for 3 years worth of rent.

Landlords are almost always going to require personal guarantees when leasing office space, however keep in mind the terms and conditions are negotiable.  Don’t think you have to accept what they give you.  With a little patience and negotiating you can eventually agree to a personal guarantee that limits your risk.

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