General Guide to Negotiating Commercial Leases

By: Jalpa Shah

The collapse of the commercial real estate industry has caused landlords to ask for additional personal guarantees when negotiating the commercial lease with a tenant. Business owners often come to us confused about this requirement because we normally caution them to keep their business and personal finances separate to avoid any possibility of piercing the corporate veil. The requirement for personal guarantee puts the client’s personal properties at risk and gives rise to a potential indication of co-mingling of personal and business assets, which eventually may also lead to hiring a bankruptcy attorney. To avoid these long-term loses, below is a general guide to negotiate around the personal guarantee.

1. Just because the landlord asks for a personal guarantee, it does not mean you cannot negotiate.
   In any business, negotiations are a form of art. When a contract is put in front of you, you are not going to sign without reading it or understanding it. In most business relationship, both sides have an opportunity to negotiate the terms. Use the opportunity to negotiate before signing the lease. The worst thing that can happen is that the landlord will refuse to negotiate any terms. The best outcome that can result is the landlord will agree to work with you on the terms that are not agreeable for you.
2. Understand the law in your state.
   Before signing a lease, understand what is absolutely required in a lease and how certain clauses will affect you in case of a lawsuit. Do not rely on bankruptcy to resolve all solutions. For example, a Chapter 13 bankruptcy, in case of a personal guarantee, will not dissolve all debts. Rather, the court will likely create a payment plans so you can pay the creditors.
3. Due your due diligence before signing a lease.
   This goes hand in hand with the second suggestion. Do your due diligence. If you are not able to, hire someone who can. By due diligence, I am not referring to just understanding the law. Having a tour of the property and understanding the construction improvements required on the property for your business will help you negotiate.
4. Build a relationship with the landlord.
   When negotiating, remember the landlord’s perspective. He/she does not want to lose money when the tenant is not able to pay rent. Learn to build a relationship in which you understand what is most important for the landlord and where you have room to negotiate.
5. Increase the security deposit.
   In building a relationship with the landlord, keep in mind that certain concerns of the landlord can be resolved through increasing the security deposit on the property. This may resolve many of the concerns the landlord may have in signing the lease.
6. Shorten the lease term.
   Many business leases can avoid the personal guarantee when the term is shorter with an automatic extension. Start with a one year lease to build trust with the landlord, to show that your business is a reliable business. Many times, the landlord may not require a personal guarantee at the time of the extension of the lease if the landlord feels like he can trust your company to make all payments.
7. Reduce cost of construction, if construction is required on the property.
   During your due diligence period, you will notice certain construction requirements from the landlord’s end. You may ask the landlord to remove the personal guarantee by letting go of the additional construction costs on the property. However, be sure that the property is compliant with the local regulations.

If the above does not completely free you of the personal guarantee, negotiate with the landlord to limit the personal guarantee. One way to limit the personal guarantee is to write a guarantee for only 6 months after an early breach of the lease. This way, if you have 3 years left on your lease at the time of the breach, you will not be responsible for the entire 3 years. This can guarantee some payment to the landlord and will avoid some payments from your end.

There may be other case-specific strategies to use in your commercial lease. Be sure to hire an attorney who not only understands the real estate regulations in your state, but can also build a relationship with the landlord and negotiate on your behalf.