Commercial leases are a cornerstone of the UK commercial property market, forming the legal basis on which businesses occupy their premises. For business owners, especially those starting out or expanding into new locations, signing a commercial lease is both an exciting step and a significant financial risk. However, within many lease agreements is a clause which can have substantial consequences for Directors and proprietors: the personal guarantee.
What is personal guarantee?
At its heart, a commercial lease is a contract between a landlord and a tenant (usually a Company or Partnership) granting the right to use business premises for a specified period, in return for rent and compliance with certain obligations. A personal guarantee is a legally binding commitment, usually made by a Company Director or business owner, to be personally liable for the tenant’s obligations if the business defaults. For landlords, it is a form of security – an assurance that someone with personal assets stands behind the Company’s commitments under the lease.
Why are personal guarantees of leases common?
Landlords often require personal guarantees, especially from new or small businesses, companies with limited trading history, or those set up as limited companies or LLPs (Limited Liability Partnerships), where the business structure otherwise protects individuals’ assets.
Common scenarios where landlords may seek a personal guarantee include:
- The tenant is a newly or recently incorporated Company with little or no trading history or weak financials
- The business is structured to limit personal liability of its owners
- The landlord perceives higher risk due to the nature or location of the business
What are the types of personal guarantees?
Not all personal guarantees are the same. Common forms include:
- Unlimited guarantee: The guarantor is liable for all the company’s obligations under the lease, including rent, dilapidations and legal costs, with no financial cap
- Limited guarantee: The guarantor’s liability is capped, for example, to a fixed sum or a period (such as six months’ rent)
- Time-limited guarantee: This may expire after certain conditions are met, for example, after a period of timely rent payments or after a set number of years
What are the implications of signing a personal guarantee?
Business owners and Company Director’s need to be mindful that personal guarantees can potentially impact other business or personal finance aspects:
- Personal asset exposure: If the business defaults, the guarantor’s home, savings and other assets could be at risk.
- Credit impact: A call on the guarantee or any resulting court judgment may affect the guarantor’s personal credit rating.
- Family finances: Liability may extend to jointly held assets such as a matrimonial home and there may also be risks if the guarantee is not disclosed to co-owners or family members.
Given these risks, it is crucial to fully understand the commitment of the personal guarantees and seek to negotiate the most favourable terms possible.
Negotiating commercial leases and personal guarantees
Tenant strategies
- Demonstrate financial strength: Supplying strong financial information or a larger rent deposit may persuade a landlord to waive or limit the guarantee requirement
- Negotiate the scope: Request a cap on the guarantee, or a reduction in liability over time (for example, if the business demonstrates good payment history)
- Carve-outs: Seek to exclude certain liabilities – such as consequential losses or legal fees – from the guarantee
- Parent company guarantee: Where available, a guarantee from a stronger parent company may satisfy the landlord
- Release provisions: Set out in advance when the guarantee will fall away, such as on assignment of the lease or a sale of the business
- Consider getting Personal Guarantee insurance cover
Clauses to check
Pay close attention to:
- Scope of liability: Is the guarantee limited to rent, or does it also cover repairs, dilapidations and other liabilities?
- Enforcement: Is the guarantee enforceable under UK law and are there statutory limits?
- Release mechanisms: Are there clear conditions for the guarantor’s liability to end, such as transfer of the lease?
Alternatives to personal guarantees
Business tenants in the UK may be able to negotiate alternatives, including:
- Offering a larger rent deposit to give the landlord additional security and comfort
- Providing the landlord with a Bank Guarantee or Letter of Credit instead
- Suggesting a rent prepayment to reduce the landlord’s risk
Practical steps for prospective tenants
Before signing a commercial lease or personal guarantee, it is essential to:
- Obtain legal advice including a full lease review from a lawyer with commercial property experience
- Assess the risk, especially the potential impact on personal finances, including in worst-case scenarios
- Lease and guarantee terms are often negotiable so there is no need to accept the first deal offered without discussion
- Make sure all negotiated points are properly recorded in the final, executed documents
Can a personal guarantee be revoked?
Certainly not unilaterally by the tenant. However, it may end if the appropriate conditions in the lease are met, such as it being assigned to a new tenant or after an agreed time period.
Does selling the business end the personal guarantee?
Unless the lease or guarantee contains a relevant release provision, the guarantor could remain liable even after the tenant Company sells the business. It is essential to negotiate and to document release provisions at the outset.
Does business insolvency end the personal guarantee?
No, the landlord can still pursue the guarantor’s personal assets, unless the guarantor takes action to protect them through an Individual Voluntary Arrangement or is already subject to a Bankruptcy order.
Commercial leases and personal guarantees are a fundamental part of the business property landscape. While a personal guarantee offers landlords peace of mind, it also adds personal risks for the Director or business owner. By understanding the legal framework, negotiating where possible and seeking expert advice, guarantors can secure space for their Company’s operations, whilst also safeguarding their personal assets.
There is a direct relationship between the speed and timing of action and the quality of the eventual outcome for all of the stakeholders and at Opus, we have extensive experience assisting business owners and directors with concerns and challenges. We will always work with you to find the best solution for you and your business. If you would like to speak to Opus, one of our Partners would be more than happy to have a non-obligatory, confidential chat with you. We can be contacted at rescue@opusllp.com or call us on 0203 995 6380 and we will arrange for a call with one of our specialists.