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Let’s Keep it PG: What are You Guaranteeing?
Picture this: it’s Friday night, and you just signed a commercial lease for a fantastic space in a great neighborhood. In fact, you’re opening up the only coffee shop/wine bar concept in a 50-mile radius. You also read this blog so of course you made sure to form an LLC and listed that LLC as the tenant entity. Ah…limited liability. Feels good, doesn’t it? You also went ahead and signed that individual guaranty at the end. It was only a couple of pages long and seemed straightforward enough, why look too much into it anyway?
You Just Signed Your Life Away
Okay, sorry, maybe that was a bit much. Let’s take a step back. What is an individual guaranty anyway? In a nutshell, an individual guaranty is your promise to step in and be liable if your entity breaches the agreement at issue. It will typically include a term permitting the counterparty to go after you as the deep pocket directly without having to first go after the entity. This means full individual liability and, as such, the counterparty can go after your bank accounts, investments, business interests, and potentially your home, depending on applicable exemptions.
Which leads us to a more accurate header…
You Just Signed Your Limited Liability Away
That’s more like it. One of the primary reasons people form LLCs and corporations is to create that “corporate veil” which functions as a legal boundary between business risk and personal assets, provided, of course, that corporate formalities are followed. Once a personal guaranty comes into the picture, that boundary is erased, and you are the backstop for the duration of that guaranty. In commercial leases, for example, that exposure can be significant, particularly if it’s a standard commercial lease with multi-year rent, common area charges, real estate taxes, and acceleration clauses.
While an “unlimited and unconditional” guaranty means exactly what it says, there are still ways to try and make it less punitive.
Let’s Soften the Blow
If a counterparty insists on a guaranty (i.e., in a commercial lease) due to the fact that you’re a newer entity with limited to no financials, there are some buffer options. For example, in a lease, a good guy guaranty limits your exposure. It essentially provides that you guarantee the lease only while the tenant entity remains in possession, and if the tenant vacates the premises properly and returns the space in required condition, your future rent liability stops. This doesn’t mean that the tenant isn’t still on the hook, it just limits your exposure to things like rent acceleration.
Another way to reduce exposure is to limit the guaranty to a set period of time, or to have it otherwise drop off after a number of on-time payments are made. Bottom line is this: if you’re going to put your name on the line, make sure it’s thoughtful and intentional, not mechanical.
One last thing, if you’re still digging yourself out of the snow, don’t lift your shovel over your heart. And on that morbid note, an individual guaranty is an inevitable cost of doing business, just make sure you at least have life insurance to cover the unexpected. Stay warm, stay safe, and as always, if you’ve got questions, you know we’ve got answers!
~ The W + K Team
ABOUT WEINSTEIN + KLEIN P.C.
Founded in 2019, Weinstein + Klein is a modern boutique law firm that serves as outside general counsel to businesses across industries. Weinstein + Klein provides strategic, day-to-day legal support with a focus on labor and employment law, corporate and transactional matters, and business litigation. Weinstein + Klein works closely with business owners, executives, and entrepreneurs to proactively manage risk, navigate complex employment issues, and handle key transactions – from formation to funding to exit.