Late last year, Boston Market suddenly closed more than 300 locations across the country, including several in Central Florida. Today, there are “for lease” signs in front of many of their still vacant locations.
For the owners of the buildings, this can be very difficult as many of the sites are owned by investors and family trusts. In today’s marketplace, finding new tenants for commercial space designed and built for a specific client can be very difficult.
And recouping lost rent will be extremely difficult. After all, the company owes $2.7 million in back pay in New Jersey. It owes another $300,000 in back pay and taxes in Colorado. U.S. Foods claims it is owed $11 million by the company.
According to Bisnow, there have been more than 140 lawsuits filed against Boston Market since 2020!
While there may be little recourse for the owners of those properties (as you can’t be paid if the company is broke), the empty spaces are a reminder that as a landlord, you can ask for a personal guarantee when leasing your commercial space.
The personal guarantee helps protect your investment in case your tenant shutters or stops paying rent, but it has to be written right.
The attorneys at The Orlando Law Group can help you protect your investment as the commercial real estate market changes and more businesses decide to leave commercial spaces – or close altogether.
What is a Personal Guarantee and why do you want one?
When a lease is signed by individual people, a personal guarantee may not be needed. The most common usage of a personal guarantee can be found when the tenant is an entity.
A personal guarantee is signed by the owners, members, managers, directors or other individuals who make up the Tenant entity. In the event that an entity fails, closes, or otherwise goes bankrupt, the personal guarantee serves to allow the Landlord to seek damages against the members of that entity in their individual capacity.
Signing a lease with many smaller businesses, particularly ones without a track record of financial success, can be a risky investment because an entity is only worth the assets that the entity has. If there are no assets, there is nothing for the landlord to pursue to rectify their damages.
The small business often insulates the company signing the lease. For instance, most locations of a restaurant chain are separate limited liability companies. With this structure, a business can protect assets in other locations or companies if any individual location is shuttered.
For the landlord, this can be very difficult to recoup expenses, especially if the tenant has built a custom space that does not conform to the requirements needed for replacement tenants.
Frankly, most owners of commercial property would love a lease from a company like Boston Market. After all, the company was a subsidiary of McDonalds for two decades. It had a long track record of success.
But for many leases, a personal guarantee is important to protect your income.
In many cases, the best way to protect an investment is through a personal guarantee.
How does a personal guarantee work?
A personal guarantee allows the owner of a commercial property to find compensation through assets outside of the company’s assets.
By signing a personal guarantee, the tenant is putting most of their assets up as collateral for signing a lease. This includes a wide range of assets, although in Florida the personal homestead cannot be used to recover losses.
In the personal guarantee, it is recommended to outline what is specifically going to be used for collateral. In addition, many businesses have partners and it’s important to ensure all partners on a business are part of the personal guarantee.
Of course, the business owner can refuse to sign a personal guarantee as part of the leasing process, but that may be a red flag for the business, where an owner does not want to risk his or her personal property – but will allow you to risk your investment.
What is in a personal guarantee?
A personal guarantee can be structured in a variety of ways, terms and with other conditions.
For instance, we recommend personal guarantees to last the term of the lease in many instances but understand this can be a negotiating point in the contract. We will help you review all financial statements to determine if there could be an end date with successful lease payments – like two years.
We also recommend a personal guarantee is written to cover any loss of income, including all back rent and other money owed. However, personal guarantees can have a cap on the amount paid from personal assets.
As with any contract, the terms of the personal guarantee will depend on the specific details of your situation and nearly all parts of the personal guarantee can be negotiated.
That’s why it is essential to work with the attorneys at The Orlando Law Group to ensure your investment is protected.
Can a personal guarantee be broken?
There are many ways to end a personal guarantee if both you and your tenant agree. The space could be subleased to another tenant. The tenant could have personal guarantee insurance.
It is very common for a tenant to ask to review or end a personal guarantee early, a decision that should be made after significant due diligence, just like when the personal guarantee was first established.
Of course, if the business owner files for bankruptcy protection, the personal guarantee becomes another debt to be considered by the courts.
The entire process can be very complicated, and it is essential you work with an attorney to protect your assets as much as possible.
Alternatives to a Personal Guarantee
As previously stated, a personal guarantee is a point of negotiation and is not required for a lease. and maybe disputed by the tenant. A few possible workarounds could be:
- Financial statements from the proposed tenants showing income generated sufficient to pay for the rent;
- An increased security deposit to buffer some time if an eviction is necessary. If you choose to go this route, it is very important to make sure that the lease does not limit your ability to assess damages against the security deposit.
The attorneys at The Orlando Law Group can help commercial property owners with evictions and other tenant issues in Orlando, Waterford Lakes, Altamonte Springs, Winter Garden, Lake Nona, St. Cloud, Kissimmee, and throughout Central Florida.
If you have questions about anything discussed in this article or other legal matters, give our office a call at 407-512-4394 or fill out our online contact form to schedule a consultation to discuss your case. We have an office conveniently located at 12301 Lake Underhill Rd, Suite 213, Orlando, FL 32828, as well as offices in Seminole, Osceola and West Orange counties to assist you.
The articles on this blog are for informative purposes only and are no substitute for legal advice or an attorney-client relationship. If you are seeking legal advice, please contact our law firm directly.
Last Updated on March 5, 2024 by The Orlando Law Group