Personal Guarantees on Commercial Leases: What BC Business Owners Are Signing

You incorporated so that the business, not you, carries the risk. Then the landlord's lease arrives with a page at the back for you to sign personally as guarantor or indemnifier. Signing it can put your own savings, and sometimes your home, behind the company's rent for years.

A personal guarantee is often negotiable, but only before you sign. This article explains what these clauses usually say, why they can last longer than owners expect, and the changes that commonly reduce the risk.

Why landlords ask for a personal guarantee

A BC company is a separate legal person. Under the Business Corporations Act it has the capacity and rights of an individual, so it can sign a lease in its own name and is responsible for its own debts. If the company runs out of money, the landlord's claim is normally against the company alone.

That is exactly why landlords ask for more. A new or small company may have few assets, so the landlord wants a person with assets standing behind the lease. The personal guarantee turns the company's promise to pay rent and perform the lease into your promise as well.

For a wider look at the lease itself, see our article on commercial lease clauses to review before you sign. This post focuses only on the personal guarantee page.

What the personal guarantee usually says

Wording varies, but landlord-drafted personal guarantees commonly include terms like these:

• Guarantor and indemnifier. You agree both to pay if the tenant does not and to compensate the landlord for its losses (the indemnity part). The indemnity language is designed to keep you liable even if the tenant's own obligation is reduced or ends.
• Primary obligor. The landlord can come straight to you without first suing the company or using up the deposit.
• All obligations, not just rent. Basic rent, additional rent such as taxes and operating costs, repairs, restoration at the end of the term, interest, and the landlord's legal costs.
• Joint and several liability. If two or more owners sign, the landlord can recover the full amount from any one of you.
• Waivers. You agree that changes, extensions, delays or indulgences given to the tenant do not release you.

Because the personal guarantee usually covers the whole lease, the realistic exposure is not one month's rent. It can be the rent for the rest of the term, less whatever the landlord recovers by reletting the space, plus costs.

Why it can last longer than you expect

Owners are often surprised by how long a personal guarantee survives. Depending on the wording, it may continue through:

• Renewals and extensions. Many leases say the personal guarantee extends to any renewal or extension term, sometimes even at a higher rent you never approved.
• Amendments. If the lease is later amended, for example to add space, the guarantor may remain liable for the amended lease unless the document says otherwise.
• Assignment. Selling the business often means assigning the lease to the buyer. Many leases say the original tenant and its guarantors are not released by an assignment, so you could remain on the hook for a business you no longer own. Our guide to lease assignment when a business is sold covers the process from the buyer's side.
• Insolvency. If the tenant becomes bankrupt or insolvent, the landlord will usually look to the guarantor. Whether you stay liable after the lease is ended in an insolvency depends heavily on the drafting, which is one reason indemnity language is so common.

Ways to limit your exposure

Landlords' first drafts are written for landlords. Depending on the market, the property and the strength of your business, some of these changes may be achievable:

• A dollar cap, such as a fixed amount or a set number of months of rent.
• A time limit, for example the personal guarantee falls away after the first two or three years if the tenant is not in default.
• A burn-down, where the capped amount reduces each year the rent is paid on time.
• No renewals. The personal guarantee covers the initial term only, or any renewal requires your fresh consent.
• Release on assignment. You are released when the lease is assigned to an approved buyer with a replacement guarantor or adequate financial strength.
• Notice of default. The landlord must tell you promptly if the tenant falls behind, so a problem does not grow for months.
• Alternative security. A larger deposit or a letter of credit instead of, or to reduce, the personal guarantee.

None of these is automatic, and a landlord may refuse. But it is much easier to negotiate at the offer to lease stage than once the lease is drafted, and almost impossible after it is signed.

Formalities and who should sign

In BC, section 59 of the Law and Equity Act says a personal guarantee or indemnity is not enforceable unless it is evidenced by writing signed by the guarantor or indemnitor (or their agent), or the person has done an act showing that a promise consistent with the one alleged was made. In practice, commercial landlords use a signed written document, and once you sign it you should assume it will be enforced as written.

Think carefully about who signs. Landlords sometimes ask for a spouse's signature as well, which puts family assets at risk. Any person asked to sign should understand the document, and a landlord may want confirmation that they had the chance to get independent legal advice. Signing a personal guarantee is a separate question from your duties as a director, which we discuss in our article on director personal liability in BC.

Plan for the day you sell

Keep a copy of every personal guarantee you sign and diarise renewal dates. When you later sell the business or the shares, ask early whether the landlord will release you, and make that release a condition of the deal where you can. A buyer who takes over the premises will often be asked to provide a new personal guarantee, which gives you something to offer the landlord in exchange for your release.

Asked to sign a personal guarantee? Have it reviewed first

Our business lawyers can review the lease and the personal guarantee, explain your exposure, and negotiate limits with the landlord before you sign.

Call 604-259-2844 or send us a message to arrange a consultation at our Vancouver office.