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When is a Personal Guaranty Not Needed in a Commercial Lease?

guarantee

I recently had a conversation with a client regarding obtaining a personal guaranty for a lease that was executed by an individual “doing business as.”  I am under the impression that a guaranty of lease is only necessary when a lease is executed where the tenant is a corporation or LLC.

Being a CCIM Designee I have the availability of asking the opinion of thousands of fellow CCIM brokers across the nation.  I posed the question, “Is a guaranty of lease needed to secure personal liability when the lease is executed by an individual?” to approximately 8,000 brokers – and the replies came pouring in. 

You can arrive at your on decision, but in my opinion a personal guaranty is not needed when the lease is executed by an individual.  However, it is important to get the tenant’s spouse either on the lease as a co-tenant or as a guarantor (at least in California).

One more thing, I am not an attorney, nor do I claim to be one.  When it comes to specific lease terminology I would suggest you seek the counsel of an attorney.

-Burt

Here is a list of some of the responses:

  • I always try and get a personal guaranty as well as the signature on the lease. My standard leases are set up that way.
  • No, when the person signs individually, my understanding is that they are personally guaranteeing the lease.  I do a lot of tenant and landlord rep and that is how both sides as well as their attorneys have handled it.  In my area, landlord’s get personal guarantees on businesses that are not necessarily sole proprietors unless they have a long history of existence as well as strong balance sheets.
  • No, the individual by signing is guaranteeing the lease.
  • We always require a personal guarantee on the lease signed by the husband and wife for every member of the tenant group. Exception is a national corporate lease guaranteed by the national corporation.
  • According to my trusted CA real estate attorney the answer is "no".
  • I just went through this with our attorney and he indicated the sole proprietor is the guarantee.  Getting a guarantee is a duplicate effort.
  • A personal guaranty is not necessary, but it is expedient.  A personal guaranty takes very little to perfect a judgment.  Collecting under a lease is a long process subject to various state law, and mitigation of damages.
  • A Personal Guarantee is only good from a viable third party.  An individual signing a lease in a personal capacity (not in a corporate officer or LLC managing member capacity) cannot Guarantee their own lease, that's why you have them sign personally to begin with.  If the issue is more technical than that suggest your client contact his attorney for specifics to the proposed lease transaction.
  • Yes.
  • No, it is redundant in the case of a sole proprietor because there is no separate legal entity other than the individual himself.  However, if it makes your client more comfortable, your sole proprietor tenants can simply execute leases on behalf of themselves without the d.b.a. reference.  It shouldn't matter to the tenant, and it should give your less-than-knowledgeable landlord the peace of mind he needs.
  • A personal signature is pretty much the same thing as a personal guarantee. I’m sure the owner will want to review the individual’s financial statement and credit report.  During these tough times, perhaps the owner will have more options to choose from if he doesn’t require a personal guaranty. A lot of potential tenants will simply pass if they need to put their personal assets at risk.  Check out other options to secure the lease.
  • In my experience, if the lessee (Tenant) is an individual, no additional personal guarantee required, but it doesn’t hurt to have one.  That being said, California is a community property state; therefore, you need to get the spouse to sign as well, if the lessee is married.  In that case, the lease would be under the name of both spouses with both executing the lease. I’m sure you already have a credit report, but if you don’t, then include the home address, phone and SSN’s in the signature block.
  • No.
  • I require a personal guarantee because I deal in a multi state territory. Not being a lawyer I don't want to risk loosing personal liability over technicalities that vary state to state. Also this provides insulation from evolving case law & new legislation that might slip by me.  No, it is redundant and unnecessary.  It is like saying if you die, I am going to shoot you too.  It would be like getting a personal guaranty on your home mortgage, that is in your individual name.
  • The exception to it being redundant is if the sole proprietor is married, and then a personal guaranty would have value to the landlord, IF his/her spouse signed it (and was not already on the lease itself).
  • If you indicate the person’s name and identify as an individual, then it is not necessary to get a personal guaranty because he is acknowledging that he is signing as an individual.   If he is a married man it is a good idea to have his wife acknowledge the lease; although again, not necessary.   Example John Smith, an individual, dba ACB Company, a sole proprietor.  Also make sure the signature page is the same.
  • In my experience the individual signature is the same as a guaranty.  I have had property owners (mostly small property owners) who require a bank letter of credit.
  • You do not need a personal guaranty if the individual is signing.  Only for corporate leases, LLC, etc.
  • In that case, the personal guaranty would be redundant.  As long as the tenant is identified as [individuals name], individually and doing business as [name of dba], that should suffice.
  • My experience includes GA, Fl, NM, and TX. If lease is as individual regardless of dba status it's as good as a signed guaranty.
  • It’s been my understanding that a personal guaranty is not necessary when and individual is signing the lease as a sole proprietor.  However, there are some in the legal community that may disagree with this.  Generally speaking, when an individual signs a contract as an individual they are bound by the terms of that contract and offer their personal assets as a guaranty for payment.  Keep in mind that I have also been instructed that personal pension plans (i.e. 401K’s, etc.) are exempt from being used as collateral.  I would suggest that you seek further legal advice on this topic.
  • If the natural person named on the lease is the same as that on the guarantee, the guarantee will not add anything more to the the individual's obligations or liabilities than is already set out in the lease. If this person is married and the state is a community property state (as California is), the spouse should sign the lease as well.
  • I’m curious what an attorney would say and how the laws in the state of California affect this, but typically a personal guarantee is a third party (a natural person or community property estate in the case of a personal guarantee) and not the entity signing the lease (whether the lessee is a natural or unnatural person in the case of a corporation) who guarantees performance of the lease terms in addition to the liability incurred by the entity (natural person or otherwise) entering the lease.
  • I am not an attorney but in my opinion if the tenant signs the lease as an individual vs owner of “ABC, LLC” you should have a personal guarantee.
  • You are correct - a lease signed by an individual is a personal guaranty. The only reason for any additional document would be if there were some specific terms of the guaranty that the owner wanted spelled out.
  • I am a CCIM and California real estate attorney (28 years). Generally, the guaranty in such a situation is redundant (often called a sham guaranty); however, sometimes the guaranties contain certain waivers of rights which would otherwise be available to the underlying obligor (here the tenant). If representing the tenant, I would certainly argue that the requirement for the tenant to execute a guarantee of an already existing lease obligation is not appropriate.  So it boils down to what’s in the guaranty. Generally, however, I do not recommend it. If, at some point, the tenant wanted to assign the lease, and your client did not want to release the original tenant but permit the assignment , then for clarity a guaranty should be executed as a part of the landlord’s consent to the assignment (typically, however, unless the lease otherwise provides, the original tenant is not released unless by express written release.  Please be advised, the foregoing is being provided to you as a courtesy only, and no attorney/client relationship has been established. Your client should seek counsel from an attorney, and rely on that advice given in the context of an attorney-client relationship, as any direct advice you give to him would constitute the practice of law, which you would want to avoid unless you are a licensed attorney.
  • I'm not an attorney, but in all my years of leasing, if the tenant is an individual, then a personal guaranty is redundant. The "dba" doesn't affect the fact that the tenant is the individual. I have seen wording that specifically describes the tenant as an individual, e.g. "John H. Doe, and individual, doing business as ABC Roofing".  The other issue, of course, is if the individual is married, then you really need the spouse either named as the tenant or as a guarantor. Otherwise, assets held jointly like their house, are not accessible for the landlord.
  • In my opinion, if the lease is in the name of the tenant (i.e., John Q. Public) and signed by the tenant, no guaranty is needed. "Doing business as" does not lessen the tenant’s personal liability.
  • Based on my understanding, an individual signing a lease is already on the hook 100%.  But we make sure that if he's married, we have both spouses execute the lease.  That way, if they divorce two years into the lease, you're not limited to assets retained by the signer.  You still have access to assets transferred to the ex-spouse as well.  Also wanted to offer up a suggestion, based on our experience here:  You could probably get your owner to accept varying levels of personal guarantees.  We have seen guarantees that fluctuate between full and limited guarantees.  We have negotiated guarantees that decrease over time.  Also, some of our guarantees have been set to equal certain dollar amounts, such as the amount of Tenant Improvements.
  • If they sign personally on the lease (not d/b/a) there is no need for a personal guaranty (that is what my attorney has always advised).
  • No, but pending the State we have the spouse as a guarantor and then if their joint financials are weak we ask for another party to also be a guarantor.
  • The attorneys I’ve worked with over the years on leases have consistently indicated that adding a personal guarantee when the defined tenant is an individual is redundant.  That party is already obligated per the lease with or without an additional express guarantee.  Thus the guarantee is to add an additional party essentially as a co-signor, not the primary party, but to guarantee if the primary party does not fulfill its obligations.
  • If the lease is to an individual, a guaranty by that individual is redundant.
  • Nope.  When the individual signs for himself he is personally liable.  The dba means nothing... doesn't shield him.

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