How to reduce risk of a personal guaranty of restaurant lease

What is a personal guaranty for a restaurant lease?

A personal guaranty is a security instrument whereby the person signing the guaranty “Guarantor” remains liable for the monetary obligations of the restaurant lease.

If you operate your business as a corporation or limited liability company and wish to lease commercial real estate, the property owner will often require a personal guaranty.

Why should you be concerned about signing a guaranty?

Many business owners do not give much thought to signing a guaranty. As an honest person, you intend to pay your rent during your tenancy. But what if you assign the lease or sell the restaurant?

A personal guaranty will typically remain in effect for the entire term of the lease and any options if exercised. With typical lease terms of five to ten years, you can remain liable years into the future for a restaurant you no longer own.

Example:

The following is a true story. A franchisee with multiple stores sold one of his restaurants and assigned the lease to the new owner.

Approximately three years later he was notified by the landlord that the restaurant had closed and he was liable for rent.

He had signed a personal guaranty for a restaurant lease with a term of 10 years.

How do you protect yourself when signing a personal guaranty?

There are different methods to reduce your risk exposure with a personal guaranty. Here are a few ways:

Limit the period of time

Reduce the period of time that you remain liable. If you are signing a five-year lease, limit the personal guaranty to the first 24 or 36 months.

Limit the guaranty to a fixed amount of money

Reduce the total liability to the lowest fixed dollar amount. For example, the maximum personal guaranty shall be limited to an amount equal to twelve months’ rent.

Increase Security Deposit

If you have the capital available increase the security deposit. For example, a landlord may agree to a security deposit equal to 6, 9 or 12 months rent. Many landlords will agree to burn off the deposit over time if you pay rent on time. For example, the landlord will provide a credit towards rent for the 13th, 25th, 37th and 61st months rent so that you deposit is reduced over time.

This article provided a few examples of how a personal guaranty can jeopardize your financial future when you sell your business and/or assign a lease.

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Cheers!

Mark Chase

Restaurant Real Estate Advisors