When renting, leasing or purchasing property, it is vital that the agreement signed which contractually binds two parties together is understood fully. This may mean reading it and asking questions for clarification, hiring a lawyer to assist with the documentation or similar situations.
However, this is vital when the lease affects a business owner or an individual attempting to create or grow a company. A guarantee is often requested of someone starting a business with a commercial lease. This provides an aspect of security even if the company ends. There may be a secondary source of funds or another manner in which to make payments, and this gives the landlord peace of mind.
Lease guarantees are generally risky for startup and new companies where revenue is not secure. If the tenant is unable to make payments or arrangements for payment to be completed, the landlord may obtain the monies from the other source specified in the lease guarantee. This may even be personal assets of the business owner or manager. This means bank accounts, job income and even real estate may be seized by the landlord. A lien may be placed on the real estate holding, or the tenant may need to take out a loan against the business. Legal aspects of this dealing may cause negative consequences if the tenant is unable to ensure funds are available for the commercial lease.
Why Commercials Lease Guarantees?
Many individuals that obtain a commercial property where a lease guarantee is required do so under the protection of a company behind them. This means they use the funds of the corporation to funnel into the lease agreement payments. The business may be a shell, a true company or singly owned by the individual. While even with company backing, lease agreements started changing due to the lack of agreed upon payments being received. Many organizations failed, and landlords were without the rent or lease amounts as were promised through the contract terms. Because of this, commercial leases more often have guarantees attached to provide funds to the landlord even if the business behind the individual fails.
Legal consequences occurred for those tied into commercial leases when the business was unable to pay the rent. If the landlord needed to go to court to sue for the monies, other legal fees and expenses may be added to the total. It is possible that the landlord of the property would need to contact a judge or other legal persons to attempt to evict the tenant when payment for the lease was not obtained. These complications have educated these landlords so that contracts signed ensure they are paid or the tenant is removed from the premises. Knowledge of these conditions is compulsory for both the landlord and the tenant before he or she moves into the property. The commercial lease has clauses that stipulate payment dates, amounts and the guarantee to provide the funds even if they come from a secondary or tertiary source.
The Necessity of a Guarantee
Before an agreement to lease the property is initiated, it must be determined if a guarantee in the lease for payment of rent is needed. This may be discussed by both landlord and potential tenant, or it may occur with a lawyer and the landlord. It may be determined that no guarantee should be included based on the assets of the business owner or by proof of secondary incomes. Some evidence that a guarantee is not necessary could come from cash deposits for the property, very good credit and similar items as incentive to the landlord. This would mean that a loss of payment may not occur with the tenant, and a guarantee on the lease may be removed.
To understand better if a guarantee should be included in a commercial lease, the landlord may keep a running tally of all expenses and costs associated with a loss of payment and removing the tenant from the property. If this number is high, he or she may feel the pressure of placing a guarantee condition in the lease document. This could include building costs, cleaning and repairing, court costs and similar items when eviction is needed.
When the need arises where a tenant must be removed from the commercial property, the landlord may need to hire a lawyer. This is to ensure documents are drafted correctly and all legal aspects are valid. Additionally, this person may be the individual that included the guarantee condition.