Do I have to personally guarantee the lease for commercial property?
When a limited liability company takes on a property the landlord will often ask for a third party to guarantee the obligations under the lease which, in the most part, is to pay the rent and service charge. This is to reduce the risk to the landlord should the company become insolvent. Most landlords will ask for this guarantee if the company is relatively new, with little trading history, or in a high risk industry. Many restaurants and hospitality businesses are asked for these guarantees. It is usually the directors of the company that are asked to personally guarantee the lease. As a director this means that you are personally liable for the rent if the company can’t pay and the landlord can pursue through the courts and could even make you bankrupt.
If I can’t pay the rent can the landlord make me personally liable under the lease?
Simply, If you give a guarantee then yes. Whether it is commercially sensible for the landlord to pursue you is a different matter. If you have no assets or the amount is relatively small that you owe then it might not be worth the costs. A landlord would need to issue a bankruptcy petition and in the end it might be better to concentrate on reletting the property with a tenant that can pay the rent. Obviously the landlord is only likely to call on the personal guarantee once the company has vacated the property.
One important thing to realise is that if more than one person has been named as a guarantor then these people are what is called jointly and severally liable. What this means is that one person and/or all are liable. So it might be practicable that the landlord goes after the richest guarantor rather than pursuing each one individually especially if the others guarantors have little money!
Can I get out of the personal guarantee I have given to the landlord?
If your business has had a strong trading history and paid rent on time over a number of years then at lease renewal it would be a good idea to try and negotiate that the new lease does not need a guarantor. However, this will all be part of the negotiation and any landlord will be reluctant to give this additional security up. It might be that you can negotiate limits to the guarantee, such as it can only be claimed on in the first 2 years of the lease (incidently most business failures happen in the first 2 years) or that the guarantee does not include the family home.
How can I avoid the guarantee being called upon?
If the company is in a strong financial position then the guarantee isn’t a problem. If the company starts showing warning signs of insolvency it is crucial that the directors act. It is all too common that directors are over optimistic or blind to the signs. This can seriously increase personal liability problems.
So, the basic advice is GET ADVICE if you are worried your company could be getting into difficulty and you have a personally guaranteed the lease.