Updated: 12th March 2020
Given the complexity of many commercial leases, it is vital that you understand your rights when it comes to signing a personal guarantee for a lease. The ramifications of failing to meet lease repayments are serious, but knowing the consequences to you personally if your business starts to struggle financially, could help to protect your home and other assets.
Business landlords generally request a personal guarantee from directors because of the extended nature of a commercial lease. Their wish to protect themselves from a tenant’s insolvency is understandable, particularly when repayments are made over a period of years rather than months.
There are various reasons why you might want to end your lease early - perhaps you need to move to larger premises, or negotiate better terms on the existing lease?
Here are a few options that might be open to you in these instances:
You will need to check the terms of your lease to see if any or all of the above are possible options. If not, it is likely that you are locked in to your contract for the full term, and if you have also signed a personal guarantee, this makes the situation more complex.
At the time when you provide a personal guarantee, it is crucial to have the associated lease document checked by a legal expert. Some commercial leases include terms allowing for future variations, without having to consult you for approval as the guarantor.
This has the potential to make you liable for new terms of which you have no knowledge, and with no requirement on the landlord’s part to inform you. If you fall behind with rental payments on your business premises, and the landlord is calling upon the personal guarantee you provided, the ramifications for your personal finances are serious.
You could lose your home or the asset secured on the lease, or be forced into personal bankruptcy alongside company insolvency. A potentially bleak picture emerges, even if you have taken out personal guarantee insurance, as this only covers a proportion of the amount that would become due.
You should seek professional help as soon as possible in these circumstances. A licensed insolvency practitioner can review your own position as well as that of the company, explaining all potential options.
The first course of action will generally be to negotiate with your landlord. On reflection, and with the interjection of an insolvency professional, they may decide that reduced payments are preferable to an empty property in the long-term.
Begbies Traynor provides independent advice and guidance, and is the UK’s leading company rescue and recovery practice. We can identify any issues before you sign a commercial lease, and advise on mitigating your risks if you are required to provide a personal guarantee.