Why landlords ask for one
When you sign a lease through an LLC or corporation, the company is the tenant, not you. If the company closes, the landlord can only collect from what the company owns, which for a new or small business may be very little. A personal guaranty is your promise to pay what the company owes under the lease if it does not.
Landlords are most likely to require one when:
- The business is new or has less than two to three years of financials
- The company's net worth is small compared to the rent over the term
- The landlord is paying a large tenant improvement allowance or broker commission up front
- The space is being built out specifically for your use
Is it actually enforced?
Legally, yes. A guaranty is a separate contract, and Colorado courts generally enforce it as written. If the tenant defaults, the landlord can sue the guarantor for unpaid rent and other charges, and often for attorney fees if the guaranty says so. A judgment can be collected from personal bank accounts and wages and can become a lien on real estate you own.
In practice, going after a guarantor is a business decision for the landlord, and in my experience it is rare. A lawsuit costs time and legal fees, and most landlords would rather work out a settlement, take back the space and lease it to someone new. Colorado landlords are also generally expected to make reasonable efforts to lease the space again, and rent from a new tenant reduces what is owed.
What makes a landlord more likely to pursue you
The biggest factor is how much the landlord put into your deal that they have not earned back yet. The more incentive you took, the more they have to lose and the more likely they are to come after the guaranty.
| What the landlord gave you | Why it raises the stakes |
|---|---|
| A large tenant improvement allowance | They paid for a build out that may only suit your business |
| Free rent at the start of the lease | They gave up income they expected to earn back later |
| Broker commissions paid up front | They paid for the whole term on day one |
| Custom work like a hood, grease trap or added power | The next tenant may not want it |
| A long term with little paid so far | The unpaid balance is large |
A tenant who took little incentive and leaves the space in good shape is far less likely to be sued than one who leaves a costly, custom build out behind.
Many guaranties also waive defenses a guarantor would otherwise have, so read the waiver section closely. Closing the business or dissolving the LLC does not end a personal guaranty.
The kinds of guaranties
Full or unlimited guaranty
You guarantee everything the tenant owes for the whole lease term and any renewals, including rent, NNN charges, repairs and legal fees.
- Exposure the entire lease
- Most common for new businesses
Limited or capped guaranty
Your liability is capped at a dollar amount or a number of months of rent, such as 12 months. Above the cap, the landlord can only look to the company.
- Typical cap 6 to 24 months of rent
Burn off guaranty
The guaranty shrinks or ends after you pay on time for a set period, for example dropping by a year of rent for each year with no default, or ending after year three.
- Often tied to no defaults
Good guy guaranty
You are only liable until you give notice, pay rent through the move out date, and hand back the keys in good condition. It is more common in some markets than others, but it is worth asking for.
- Notice often 3 to 6 months
How to reduce or avoid it
Offer something instead
- A larger security deposit
- A letter of credit from your bank
- A guaranty from a parent company with real financials
- Stronger financial statements or a longer operating history
Negotiate the terms
- Cap it at a dollar amount or months of rent
- Tie the cap to the incentives, so it burns off as the landlord earns back the allowance and free rent
- Add a burn off after on time payments
- Exclude renewal and extension periods
- Release it if you sell the business or assign the lease to a qualified buyer
- Limit it to your share if you have business partners
What to check before you sign
- Is the guaranty capped, and is the cap in dollars or months?
- Does it cover renewals, extensions and amendments you did not sign?
- Does it end if the lease is assigned or the business is sold?
- Does it waive the landlord's duty to collect from the company first?
- Who else is signing, and is each guarantor liable for the full amount?
- Has an attorney reviewed it?
This is general information, not legal advice. Have a Colorado real estate attorney review any guaranty before you sign it.
Common follow up questions
Does a personal guaranty end when my lease ends?
It usually covers everything owed under the lease, including amounts that come due after move out, such as unpaid NNN reconciliations or repair costs. Many guaranties also cover renewals unless you exclude them.
Does my spouse have to sign the guaranty?
Not usually, unless your spouse is also an owner of the business or a co tenant. If a landlord asks for a spouse who is not involved in the business, push back.
Do I need a personal guaranty on a commercial loan?
Almost always for small business loans. SBA loans require a personal guaranty from anyone who owns 20% or more of the business, and most bank loans to small companies require one too.
Can I get out of a guaranty I already signed?
Sometimes. If you sell the business or assign the lease, you can ask the landlord to release you in exchange for a new guarantor or a larger deposit. Landlords are not required to agree, so negotiate the release terms at the start.
This page is general information, not lending, legal or tax advice. Programs, limits and terms change, and every situation is different. Talk with your lender, attorney and CPA before you decide.