When entering into a new lease, it is not uncommon for landlords to request the proposed tenant provides some form of security, particularly where the tenant is a corporate entity with a limited trading history.
What is a personal guarantee?
A personal guarantee is provided by an individual, usually a director of the tenant company, promising that the tenant will comply with the terms of the lease. The guarantee obligations in the lease will typically provide that the guarantor is to remedy any breach of covenant of the tenant or potentially take on an assignment of the lease so as to make the guarantor become personally liable as tenant under the lease.
Unlike a company’s liability, unless specifically provided for in the lease, a guarantor’s liability will be unlimited. This means a landlord could look to claim against any assets you hold personally.
Selling your business
When it comes to selling your business, there are usually two options in relation to the lease if this needs to be transferred to your buyer:
- Assign the existing lease
- Surrender the existing lease and request that the landlord grants a new lease directly to your buyer
The course of action to be taken will depend on the specific requirements of the transaction and what can be agreed between the parties at the time. Ideally, as a seller, the preferred option would be for your existing lease to be surrendered and the new lease granted directly to you buyer.
This will ensure that you are released from your obligations as a guarantor, and your company will not have to enter into an authorised guarantee agreement (AGA), guaranteeing the obligations of your buyer.
It won’t always be possible to get all parties to agree to this, however, in which case an application to assign the lease will be required.
The standard position in commercial leases is that, on an assignment of the lease, the outgoing tenant and any guarantor enter into an AGA. Leases don’t usually contain an obligation for landlords to automatically release you as guarantor on an assignment of the lease; this would need to be negotiated with your landlord directly.
There is no obligation for your landlord to agree to this, so you may face some reluctance, but they may be willing if the buyer is able to offer a replacement guarantor or another form of security in lieu of the personal guarantee already provided.
If you haven’t yet entered into your lease but are being asked to give a personal guarantee by a proposed landlord, investigate if a different form of security can be given instead, such as a corporate guarantee or a rent deposit. Not only will this initially limit your personal liability, but it will also mean you are not going to be liable under any AGA if you come to assign your lease in the future.