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Leasing commercial and retail property? do you need a guarantor?

Guarantors are the people (or other legal entities) who agree to be responsible for the debts of the tenant, should the tenant default.

Leasing and security deposits
If you are leasing a commercial premises it's important to ensure that your security deposit or guarantee is sufficient to cover your risk.

If a tenant is leasing the premises in his or her own name, then personal guarantees are less likely to be required.

But if the tenant is a company, it is common practice for landlords to insist on a personal guarantee by the directors and/or shareholders of the company, due to the limited liability of the company.  

For example

A tenant company could be a $2.00 "off the shelf" company with no assets or cash back up. Should things go wrong, it is easy for the company to cut its losses and simply walk away. A landlord would be limited to retrieving its losses from the company only and not the individuals who stand behind the company. This would be pertinent if the security deposit taken (usually for an amount of between 1-6 months rent) is not enough to cover costs.

Pros and Cons

Personal guarantees have the potential of being more time consuming and costly to enforce.  As such, negotiating a larger security deposit in lieu of personal guarantee/s, may be a more attractive option to landlords.

Security deposits of course, are much easier for a landlord to access should things go sour. However, security deposits being for a limited amount, carry the risk of being insufficient to cover all of the landlord’s losses, in the event of breach or early termination.

Obtaining both may be the best solution

The landlord would be best served by obtaining guarantees from the directors and/or shareholders of tenant companies – in addition to a security deposit - to ensure that if things don’t work out, the landlord will have ample scope to recover any losses.  

As mentioned above, the directors and shareholders of a company will not be personally liable for the company’s debts.  This ultimately means that a company with little or no cash backing, may be able to breach the lease or escape from a lease early, leaving a landlord with no avenue to recoup damages apart from the security deposit, which may be insufficient to cover all losses.

Alternatively, you may wish to secure a higher security deposit amount in lieu of a guarantee, which will be easier for a landlord to access should things go sour.

You will need to negotiate this issue directly with the tenant.

Resources

Commercial Property Lease Templates

Retail Lease Template

Difference between a lease and licence Read more

Difference between assigning lease and subleasing Read more

How to set up rent increase provisions in your lease? Read more

Pros and cons of subleasing a premises Read more

Short term retail leases Read more

Six bottom line issues to consider with commercial leases Read more

Why should you register a Commercial Property Lease Read more

 

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