Personal guarantee on a commercial lease explained
A personal guarantee on a commercial lease is a promise by an individual, usually a director of the tenant company, to pay the rent and meet the tenant’s obligations if the company doesn’t. If the company falls behind or is wound up, the landlord can claim against you personally, and against your own assets. How far that liability goes depends on the wording.
Why landlords ask for one
Most tenants lease through a company. A company’s liability is limited to its own assets, which may be little more than the business itself. A personal guarantee gives the landlord someone else to claim against.
Landlords usually ask the directors to sign. Some also ask for a guarantee from a parent company or a shareholder.
What a personal guarantee usually covers
Most guarantees cover everything the tenant owes under the lease, not just rent. That includes:
- rent and outgoings
- interest on late payments
- repairs and make good costs at the end of the lease
- the landlord’s losses if the lease ends early because of the tenant’s breach
- the landlord’s legal costs of enforcing the lease
Most guarantees also include an indemnity. That means you can be liable even if the lease itself turns out to be unenforceable against the company.
How long it lasts
A guarantee usually lasts for the whole term, and often for any option or holding over period too. Some go further and cover the lease even after it has been varied or assigned.
The landlord’s losses when a tenant leaves early can be large. If the lease has years left to run, the claim can include the rent for the period it takes to find a new tenant, plus the cost of any incentives the landlord gives the new tenant.
Asked to sign a personal guarantee? We check its scope as part of our lease review and tell you which limits to ask for. Have your lease reviewed.
What you can negotiate
| Limit | What it does |
|---|---|
| A cap on the amount | Limits your liability to a set sum, such as 6 or 12 months’ rent |
| A time limit | Ends the guarantee after a set period, such as the first year or two of the term |
| No option period | Stops the guarantee carrying over to any option you exercise |
| Release on assignment | Ends your liability when the lease is assigned to a new tenant |
| Release on handover | Ends the guarantee once the landlord holds a bank guarantee or bond |
| Fewer guarantors | Limits the guarantee to one director rather than all of them |
Landlords won’t agree to all of these. A cap and a release on assignment are the most common to ask for.
Personal guarantees and assignment
If you sell the business, you usually assign the lease to the buyer. Many leases say the outgoing tenant and its guarantors stay liable for the rest of the term, even after the assignment. If the buyer defaults, the landlord can come back to you.
Ask for the lease to release you and your guarantors once the assignment is complete. The buyer’s directors would then give their own guarantee.
In a retail lease, your state’s retail leases Act may release the outgoing tenant and guarantors on assignment if certain steps are followed. The rules differ between states.
Personal guarantee vs bank guarantee
A personal guarantee and a bank guarantee are different things, and many leases require both.
| Personal guarantee | Bank guarantee | |
|---|---|---|
| Given by | An individual, usually a director | Your bank |
| Amount | Often unlimited | A fixed sum, often a few months’ rent |
| How the landlord uses it | Must make a claim against you | Can call on it directly with the bank |
| Risk to you | Your personal assets | Usually the cash or property you secured it with |
Before you sign
Read the guarantee clause, not just the lease. Check who is signing, what is covered, how long it lasts and whether it ends on assignment. Every guarantor should understand what they are signing, as the landlord may later claim against any one of them for the full amount.
Questions
Something else? Enquire online or email us.
Can I refuse to give a personal guarantee?
You can ask, but many landlords won't lease to a company without one, especially a new company. A larger bank guarantee or bond is sometimes accepted instead.
Does my spouse need to sign as guarantor?
Only if the landlord asks and they agree. Before anyone signs as guarantor, they should understand that their own assets are at risk.
If the company is wound up, does the guarantee end?
Usually not. Most guarantees continue, and the landlord can claim against the guarantors for the unpaid rent and other losses.
Check the guarantee before you sign
Our fixed fee commercial lease review covers the personal guarantee, rent, outgoings, make good and options. You get written advice on what to change.
General information only, not legal advice. Every lease is different, so get advice on yours before you sign.