PERSONAL GUARANTEE – Landlord’s Perspective

We touched on the subject of a “PERSONAL GUARANTEE” (PG) in an earlier blog, so let’s expand on the subject further from the Landlord’s perspective. This can often be a controversial part of any lease negotiation, so here's a practical strategy and approach to work with.

First, a PG is simply an assurance that the Tenant (likely the principal of the company) will be personally liable financially for the lease agreement and its terms. It can be structured in many ways, for example, time limited, subject to a maximum amount ($ figure), or tied to the Landlord investment towards tenant improvements. It most often becomes enforceable when the company or entity which has signed the lease fails to meet its terms.

As Landlord, you are effectively a creditor and in some situations you may have more financial exposure than just the loss of the rental payments due. Understanding this, it’s good business to construct a PG structure that fits the particular deal you are considering. Think in terms of your risk & exposure in the event of a tenant failure, with a clear assessment of the downside potential. The best practice is to think like a banker and secure the deal accordingly.

In terms of the Tenant expectations and their willingness to accept a PG, none of it should come as a surprise. The informed ones will understand why it is required, the rationale behind it and should negotiate the best terms of a PG accordingly based on their interests. Tenants unwilling to accept a PG are limited in the market options they can consider and are in effect asking you to accept a higher risk by taking them on.

Just a final thought on a PERSONAL GUARANTEE – they never matter much the day that the lease is signed, but they do when the business fails and the lease goes into default!

CALLING ALL LANDLORDS! We would love to hear any great stories on the subject from your experience(s). As always we're just a click or call away from discussing the investment opportunities here in Windsor-Essex!

Lease Terms

Next segment in our Leasing Series…Lease Terms.

Outside of the actual lease rate itself (meaning the $’s per ft.), defined lease terms are the next most important aspect of the deal for both tenant and landlord. It represents the commitment between the parties, for a set period of time for use of the premises.

Terms will generally vary from market to market, and even from property to property. Newly built developments, be they offices/retail plazas, or industrial buildings, are based on longer term commitments for the most part. Typically 10 years would be the standard, at least for an anchor type tenant - with say 5 year leases being available only to smaller scale tenants. Lease terms are also vital to the financing which landlords arrange on these new builds. Generally landlord’s use the 5 year threshold as the bare minimum.

On existing buildings in most categories, term arrangements can become much more flexible. Start-up businesses often times prefer to stick with shorter commitments, as they are uncertain as to business volumes and growth plans in the early days. Bear in mind though, with 2 and 3 year commitments, landlords have little incentive to assist the tenant in any improvements which the space may require. Shorter term deals for the most part, would be done on an 'as is’ basis from the landlord’s side.

Just a quick note on renewal options (beyond the initial lease term). They are generally provided for on the tenant’s behalf, at a pre-set period in advance of the lease expiration (typically 3-6 months). This then gives the tenant the right to exercise his option to renew the lease, for a pre-determined period. In most instances the rental rate ($’s) , needs to be negotiated at the time of exercising the renewal option.

Again seek out experienced commercial realtors with strong leasing backgrounds, to assist you in negotiating the appropriate lease terms for your purposes.