07 3555 6333What is a Personal Guarantee in Commercial Leasing?
When it comes to commercial leasing, personal guarantees play an important role in protecting the rights and assets of property owners and tenants.
When you’re leasing a shopfront or negotiating terms for a new business premises, it’s well worth understanding what a personal guarantee actually means and why it matters before you sign on the dotted line.
What is a personal guarantee in a commercial lease?
A personal guarantee is a legal commitment made by an individual, usually the director or business owner, agreeing to be personally liable for the obligations set out in a commercial lease.
If a lease is signed by companies or trusts rather than an individual, it can give business owners the benefits of limited liability, but creates a layer of separation between the company leasing the premises and the person running it.
That’s where a personal guarantee comes in. This links the lease obligations to an individual, not just a company, adding a layer of accountability as added protection if things go wrong.
Why landlords need a personal guarantee
For landlords/commercial property owners, personal guarantees offer peace of mind. Without one, they risk entering into an agreement with what’s known as a "$2 company", a business entity with little to no assets and limited capacity to meet its financial obligations. If the tenant defaults on rent or fails to pay for damages to the property, the landlord may find they have no viable path to recover losses.
With a personal guarantee in place, the individual behind the business becomes liable if a situation arises where the company can’t meet its obligations. This provides a safety net and acts as a strong incentive for tenants to meet their responsibilities under the lease.
Having a guarantee like this also helps landlords avoid drawn-out and costly legal disputes, particularly where the company ceases trading or goes into liquidation. Having recourse to a guarantor dramatically increases the likelihood of recovering unpaid rent or enforcing the terms of the lease.
Personal guarantees: What tenants need to know
Signing a personal guarantee is a significant legal commitment.
If you’re the owner of the business and you’re unable to fulfil the obligations of the agreement, you may be pursued personally for rent arrears, repair costs or other damages.
That’s why it’s a good idea to have legal advice before signing anything. For example:
- Is the contract limited to a specific amount of money or time period, or is it open-ended?
- Are there clauses that could keep the leaseholder accountable for costs, even after the lease ends?
-Which costs is the lease holder responsible for (e.g. maintenance, repairs, security, insurance, etc)
These are the kinds of details that can have major financial implications if left unchecked.
While personal guarantees can feel daunting, they’re not inherently one-sided. Tenants who negotiate wisely, understand their rights and maintain good communication with their landlord are less likely to encounter issues.
Personal guarantees make sense for everyone
Personal guarantees are about accountability.
For landlords/building owners, they provide security and confidence that rental obligations will be met.
For tenants, they build trust with prospective landlords and improve the chances of securing a lease in the first place, particularly if the business is new or doesn’t have a strong financial track record.
When everyone understands the role and scope of a personal guarantee, it becomes a practical tool for managing risk and fostering a more stable leasing relationship.
Commercial Lease Lawyers in Caboolture and Moreton Bay
If you have any questions or would like us to assist you with a commercial lease, please call us on 07 3555 6333 or contact us here.
We're based in Caboolture and proudly service nearby areas throughout Moreton Bay.