INTERVIEW ON THE PRICE OF BUSINESS SHOW, MEDIA PARTNER OF THIS SITE.
Recently Kevin Price, Host of the nationally syndicated Price of Business Show, interviewed Alexander Paykin.
The Alexander Paykin Commentaries
Most personal guarantees are signed at the end of a deal, when everyone is eager to move forward and the paperwork feels routine. That is exactly why guarantors get hurt by them. A guarantee is not a formality. It is a separate contract that can make you personally responsible for the tenant’s obligations even when the tenant is an LLC or corporation. Before you sign, you should assume the business will struggle at some point and ask what the landlord can collect from you personally if that happens.
A personal guarantee is a promise by an individual to answer for the tenant’s obligations if the tenant defaults. In a standard guarantee the landlord can sue the guarantor for unpaid rent, additional rent, legal fees, and other amounts the lease makes recoverable, and in many cases the landlord does not need to exhaust remedies against the tenant first. Many guarantees are written to be absolute and unconditional. In practical terms that language is designed to reduce defenses and speed enforcement.
Guarantors often assume their exposure is limited to base rent. In reality, many leases define “rent” broadly to include operating expenses, taxes, utilities, escalation charges, late fees, interest, and sometimes attorneys’ fees. If the guarantee adopts that definition, the guarantor is not just covering rent checks. The guarantor may also be covering the financial consequences of a dispute over repairs, restoration, or holdover. Holdover rent is frequently increased rent, and if a guarantee runs through the holdover period a short delay in leaving can become a very expensive month.
The “good guy” guarantee is commonly presented as a tenant friendly alternative. It is not a free pass. A typical good guy guarantee says that the guarantor is liable only until the tenant vacates and surrenders the premises in the manner required by the lease and the guarantee. In other words, the guarantor’s exposure is tied to the tenant leaving properly. The benefit is that if the tenant exits cleanly, the guarantor does not remain responsible for rent through the remainder of the term.
The hard part is that surrender is usually defined with precision and often with strict conditions. Vacating is not always enough. Many good guy guarantees require removal of all personal property and trash, return of keys and access devices, written notice, and delivery of the space in a specified condition such as broom clean. They often incorporate the lease’s restoration requirements, which can include removing alterations and repairing damage. If the tenant leaves items behind or fails to complete required restoration, the landlord may argue that the space was not surrendered in compliance with the guarantee. When that happens, the guarantee that was supposed to end can continue.
Timing matters too. Some good guy guarantees require surrender within a certain time after a default or before the landlord commences an enforcement action. Some require that rent be current through the surrender date. If the guarantor assumes they can walk away at any point, they can discover that the guarantee’s off ramp is narrower than expected. A guarantor should read the surrender clause as a checklist and confirm it is achievable in the real world.
The “bad boy” guarantee is another label that sounds better than it may be. A bad boy guarantee is typically limited recourse unless certain misconduct occurs. The idea is that the landlord will not pursue the guarantor for the tenant’s full obligations unless the tenant or guarantor commits defined bad acts. Typical triggers include fraud, intentional misrepresentation, waste, intentional property damage, illegal conduct, unauthorized transfers, failure to maintain insurance, and sometimes bankruptcy related events. The details vary, and the differences are not academic. Some bad boy guarantees impose liability only for actual losses caused by the bad act. Others contain a springing full recourse provision, meaning one trigger converts the entire lease obligation into full personal liability. That can transform what looked like a limited guarantee into the equivalent of a traditional personal guarantee.
Before signing, every guarantor should focus on four questions. First, what obligations are actually guaranteed and how does the lease define them. Second, how long does the guarantee last, including whether it covers renewals, extensions, and holdover. Third, if it is a good guy guarantee, what exactly ends the liability and what steps are required to reach that endpoint. Fourth, if it is a bad boy guarantee, what events trigger expanded liability and whether that expansion is limited to damages or becomes full recourse.
There are also procedural provisions that matter more than most people expect. Many guarantees waive notice of default and waive defenses that the tenant might otherwise raise. That means a guarantor can learn about a default when a lawsuit arrives. Many guarantees also allow the landlord to recover attorneys’ fees incurred enforcing the guarantee, which can make disputes far more expensive. Some guarantees state that modifications to the lease do not relieve the guarantor even if the guarantor did not consent. If the lease can be amended in ways that increase obligations, the guarantor may be taking on a moving target.
The best time to address these risks is before the guarantee is signed. A guarantor can often negotiate limits. A cap based on a number of months of rent or a fixed dollar amount is common in some deals. For good guy guarantees, clarifying the surrender conditions and making them objective rather than discretionary can prevent later fights. For bad boy guarantees, narrowing triggers and avoiding springing full recourse when the misconduct does not justify it can keep the risk proportional.
Guarantees are leverage. Landlords use them to reduce credit risk and change behavior. Tenants can sometimes trade that leverage for value, such as a reduced security deposit, better concession packages, or more flexible assignment provisions. Even when the business needs the space, the guarantor should not treat the guarantee as boilerplate. It is often the most consequential document in the transaction.
The bottom line is simple. A personal guarantee can reach further than most guarantors expect. A good guy guarantee can become expensive if surrender conditions are not met perfectly. A bad boy guarantee can become full recourse depending on how triggers are drafted. Before you sign on the dotted line, read the guarantee as if you will have to enforce the exit plan. If the exit plan is vague, subjective, or unrealistic, fix it now.
