Q: Retail Business Space Lease
I have an existing business that is an LLC and we are moving to a new location for our business. In the new lease it calls out in our addendum for both LLC members to give a Personal Guarantee, does this negate the personal property protection that our current business LLC gives us? Should we seek alternative language in the lease as to continue to protect our personal properties?
Dear LLC Lessee: It is standard practice for a Lessor to require a Personal Guarantee ("P.G.") from the Members of an LLC. The reasoning from a Lessor's standpoint includes the primary concern that an entity (an LLC, for example) can breach a Lease by simply winding down and dissolving, thereby leaving the Lessor with no manner of collecting lost rents. You asked if your LLC still offers protection if/when the two Members sign a P.G. - no, clearly the P.G. negates the personal property protection granted from the entity to the Members (that is the primary intention of the P.G., to be able to collect lost rents directly from the Members). You asked about trying to protect your personal assets in face of a request for a P.G., and the reply to that is quite "involved". We have performed that negotiation in several lease negotiations on behalf of prospective Lessees, but we would need to know a lot more about your LLC's financial wherewithal in order to recommend the effort of undertaking that approach in your negotiations with the Lessor. To grossly simplify the approach: a successful negotiating-away the requirement of an individual P.G. required us to demonstrate to the Lessor both the willingness and the capacity of the Members to provide the Lessor with additional (and sometimes substantial) financial assurances and financial security from the LLC/Lessee such that the Lessor becomes comfortable in removing the requirement of the P.G.
JIM GREER is an attorney licensed to practice in CO and CA and has specialized in real estate transactions for the past 30 years; nothing herein shall be construed as the offering of legal advice insofar as Mr. Greer is not in an attorney-client capacity with the inquiring party.
If you sign the personal guarantee then yes, at least as to the obligation to pay rent and any other lease obligations covered by the guarantee, you will not have the LLC's protection from personal liability. The LLC's protection would continue in all other respects, such as if the business were sued for a personal injury on the premises. However, you may need to have the lessor added to your premise liability insurance so that they have protection as well.
These sort of guarantees are not unusual in commercial lease situations. The lessor is looking for assurance that you will perform under the lease, especially pay the rent and not default during the term. This may be negotiable but you probably will need to otherwise satisfy the lessor's concerns. Sometimes that can be done with strong financials for the business, etc. Or you can pledge some other asset.
The personal guarantee makes you personally liable for the debt, i.e. if the business fails the landlord can bring suit against the guarantors for payment of damages personally.
I always attempt to negotiate out personal guarantees. If the guarantee cannot be eliminated it may be reduced or restricted.
You should consider consulting with an attorney during this lease negotiation.
A: Yes, you should attempt to negotiate for the removal of the personal guarantee requirement if you can. Your LLC's history, success, and capitalization are important factors that may convince a prospective landlord to remove (or, perhaps, reduce) the personal guarantee. As others have said, the point of the personal guarantee is to create the member's liability for the lease obligations that are otherwise limited to the LLC itself in the absence of such guarantee. If the LLC does not have a long, successful history or other significant assets that can be offered as security, a commercial landlord may perceive renting to your LLC as an unnecessary risk (especially if there are other prospective tenants and the building/location is relatively attractive and easily marketed property).
A: Yes and yes.
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