What Is a Lease Guarantee?

November 18, 2021

Commercial real estate professionals have many tools at their disposal to protect their investments. A lease guarantee is one of those mechanisms. Learn more about lease guarantees and how Unique Properties, Inc. can help you with them.

What Is a Lease Guarantee and What Does It Cover?

A lease guarantee is a legal agreement between a landlord, a tenant, and a third party approved by the landlord. This third party is called a lease guarantor. Like a cosigner on a consumer loan, the lease guarantor agrees to be responsible if the tenant defaults on the rental agreement. This kind of arrangement protects landlords in commercial leases, but it also keeps tenants from eviction. Landlords may ask for a guarantee on corporate leases if the tenant lacks satisfactory or substantial credit.

Who Can Guarantee a Lease?

A lease guarantor may be a corporation, a bank, or an individual, as long as the commercial landlord is satisfied with its suitability. Here are more details on how each entity performs as a lease guarantor.

  • Corporations: Retail transactions are the most common type of lease that often requires a lease guarantor. Corporations usually guarantee the lease on behalf of the tenant, often a franchisee. This guarantee gives the new business the protection of a larger corporate entity while it gets established.
  • Banks: If the transaction does not involve a corporate partner, the tenant may ask a bank to serve as a lease guarantor. Banks usually have good credit and standing in the community, so landlords trust the bank as an acceptable lease guarantor.
  • Individual: Persons may serve as lease guarantors if they have sufficient assets and credit to satisfy the landlord. Often, a tenant’s family member takes on this role to help the tenant start the new business.

What Information Will the Landlord situation’s specifics Look Into?

Regardless of whether the guarantor is a corporation, bank, or individual, the landlord must be satisfied that a proposed lease guarantor can support the tenant in the event of a default. To make that determination, the landlord will look into the financial health of the proposed guarantor, including the party’s net worth, credit rating, and business references.

Types of Lease Guarantees

Several types of lease guarantees exist, and which one is most appropriate depends on the specifics of the situation. Here are some of the most common types of lease guarantees and what each one covers.

Absolute/Full Guarantee

The absolute or full guarantee is the most straightforward. Under this type of agreement, the guarantor promises to cover all the tenant’s obligations in the event of default. Landlords often prefer a guarantee in transactions with large retail tenants or if the tenant makes significant modifications to the property before opening the business.

Limited Guarantee

A limited guarantee is more appealing to the guarantor because the risks are more narrowly defined while still supporting the tenant. A limited guarantee may set a maximum dollar figure on how much the guarantor is responsible for, or it may start as an absolute guarantee and narrow to a limited guarantee over some time. Another form that a limited guarantee may take is to limit the extent of the guarantor’s liability for the tenant’s lease.

Good Guy Guarantee

A good guy guarantee is a limited agreement under which the guarantor is responsible for the tenant’s rent and sometimes other obligations. However, this agreement only exists while the tenant possesses the leased property and under specific conditions.

The guarantor’s responsibility ends when the tenant surrenders the property if the following conditions are met:

  • If the tenant gives appropriate notice, usually 90 to 180 days, that they plan to leave the property
  • If the tenant leaves the property according to procedures defined in the lease agreement
  • If the tenant is current on all of the requirements of the lease at the time of departure

Because a good guy guarantee doesn’t protect the landlord from all losses, it’s often paired with another form of protective measure.

Bad Acts Guarantee

A bad acts guarantee makes the guarantor responsible only for the “bad acts” of the tenant. Some of those bad acts might include:

  • Contaminating the property in some way
  • Behaving in a grossly negligent way
  • Purposely damaging the property
  • Committing acts of fraud
  • Misappropriating funds

Personal/Corporate Guarantee Versus Bank Guarantee

In large retail leases, the lease guarantor is usually a corporation. However, a bank may also serve as a guarantor. When this is the arrangement, the landlord can collect payment from the guarantor without going through the legal system.

How to Negotiate a Lease Guarantee

If a dispute arises over a lease guarantee, the interpretation of the agreement goes in favor of the tenant. That’s why you need an experienced and knowledgeable partner to help you make sure your lease guarantees are well crafted. Here are a few things that Unique Properties, Inc. can do for you.

  • Help make sure any limits don’t leave you overexposed
  • Establish an acceptable expiration date on the agreement
  • Determine whether any caps are sufficient for you as the landlord
  • Setting appropriate benchmarks that determine when a lease guarantee terminates

Is a Lease Guaranty Enforceable?

If a tenant breaks the lease terms by vacating the property without proper notice, failing to pay the rent, or damaging the space, the landlord may have to enforce the lease guarantee. Usually, the landlord will pursue the lease guarantor first and then seek damages from the tenant. To successfully enforce a lease guarantee, the language in the contract must be clear and precise on these terms:

  • Exactly which obligations the guarantor is taking on
  • The conditions under which the landlord can collect from the guarantor
  • Any limitations on the lease guarantee
  • Who should sign the lease agreement for each party

It’s essential to make sure that the lease guarantee remains in good standing if the lease changes in any way or when it renews. The lease guarantee is voided in some states when the lease term changes unless all parties agree to keep it in place.

Where Can I Learn More?

If you’re involved in commercial real estate, you know that it can be a complicated business with many lease details. Landlord/tenant issues, property management tasks, and buying and selling properties all consume your valuable time, leaving you scrambling to take care of other parts of your business. Let Unique Properties, Inc. handle your commercial real estate transactions as your trusted partner in business.

Unique Properties, Inc. offers a full suite of commercial real estate services in Denver. We handle acquisitions, dispositions, leasing, and property management of commercial properties, such as office buildings, industrial plants, retail spaces, vacant land, medical facilities, and multifamily residential properties. As a privately-owned firm, we give you personalized attention, and we’ve been taking care of clients for more than 40 years. Your business and financial goals become our goals, and we work tirelessly to help you achieve them. Contact us today to learn how we can work with you to take your business to new heights.

Featured Image: fizkes /Shutterstock

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