When a tenant signs a personal guarantee, they agree to take responsibility for their business’ debt if they fail to meet the terms of the lease agreement. In most cases, landlords enforce this guarantee when the business fails to pay rent.
As a commercial landlord, personal guarantees can help you mitigate financial losses. However, since they can affect a tenant’s personal assets, it is no surprise that guarantees are common points of contention between landlords and tenants.
That said, it is crucial to know when and how to properly enforce this guarantee.
When a business defaults on its rent
Nonpayment of rent is the most common trigger for personal guarantee enforcement, mainly because it can have a direct and immediate effect on a landlord’s finances.
If your tenant fails to pay rent on time, you must give them a grace period if your lease agreement includes one. After that, you can provide a notice of default. This gives the tenant a final opportunity to cure the default (pay the rent).
A cure period may also be applicable to your lease, wherein the tenant has three to five days to fix the problem without further consequences. If they still fail to pay the rent, the personal guarantee may become enforceable.
After a specific event
A springing or bad acts guarantee is designed to protect landlords from egregious actions and lease violations. This guarantee only “springs” into effect when a specified event occurs.
A default can also fall under this category, but there are plenty of other “bad acts” that can make a personal guarantee enforceable. Examples include:
- Fraud or misrepresentation
- Voluntary bankruptcy filing
- Criminal acts related to the property
- Damage to the premises because of negligence
- Failure to maintain insurance
It is always best to check the terms of the guarantee to see what kind of recovery you can make. Some guarantees may limit the tenant’s liability to damages resulting from the bad act.
Personal guarantees require careful consideration and assessment
These legal instruments are often complex and involve a lot of variables. It is always advisable to consult an attorney who understands commercial landlord-tenant conflicts. They can help determine if a guarantee is enforceable and, if so, help you take appropriate legal steps to protect your business.