What Is a Lease Guarantee Agreement?
A personal guarantee agreement for lease is required when the bank requires a personal guarantee from the business owner for a commercial lease. The reason for this is that the bank wants additional protection from the business owner in the event that the business defaults payments and the loan cannot be realized through the sale of the assets of the business or the existing cash flows.
When Do You Need a Lease Guarantee Agreement?
This agreement is required when the business is in the startup stage and is unable to meet the past history of profits and cash flow criteria that are mandatory to get a lease sanctioned by the bank. In such cases, the lender is guaranteed the lease payments through the entire period of the lease even if the business fails.
Inclusions in the Lease Guarantee Agreement
A co-signer agreement includes the following information:
- Names of the landlord and the tenant
- The effective date of the agreement
- Obligations of both parties
- Location of the premises
- Unconditional and irrevocable guarantee
- Covenants stating immediate payment by guarantor if tenant defaults in payment
- Representations and warranties by the guarantor
- Joint and several liabilities
- Governing laws of the state
- Reasonable attorney fees
How to Draft a Lease Guarantee Agreement?
A personal guarantee commercial lease sample can be used as a reference.
The process of drafting the agreement is:
- Eligibility of both parties
- Guarantee being provided by the tenant
- The terms of the contract
- Confidentiality clause to ensure no disclosure of information to third parties
- Dispute resolution clause
- Termination of contract clause
- Reservation of space for signatures
- Continuity of guarantee even after the transpiration of certain events
- Rights of the landlord
- Representation and Warranties of both parties
- Rights with impairments
Benefits of a Lease Guarantee Agreement
The benefits of the agreement are as under:
- Protects the interest of both parties: The lender is guaranteed the lease payments and the tenant has the rights to the use of the property.
- In case of breach of any clause in the contract, the landlord can take legal action against the tenant and claim all costs associated with the case, creating a guarantee of lease agreement
Types of Lease Guarantee Agreement
There are two types of guarantee for rental lease agreement which are mentioned here:
- Secured Guarantee: There is some form of security, like property or savings, which are used as collateral for the lease.
- Unsecured Guarantee: In this case, all your personal assets will be used for repaying the debt in case the company is unable to repay the debt.
Key Terms/Clauses in Lease Guarantee Agreement
If you look at a personal guarantee lease agreement template, here are some of the key terms that you will find:
- Survival: The agreement is continuing in nature
- Liquidity ratio certification: Liquidity ratio between 1 and 1.25
- Assignment by the landlord: The guarantor’s liability will remain intact
- Rejection of lease
- Tenant’s affiliates
- EBITDAR to Rent Ratio Certification
- Successors and assigns
What Happens in Case of Violation?
When the agreement is violated, the landlord can seek a legal remedy for the recovery of dues from the tenant. Here are some of the remedies:
- Money damages including loss of profits in case of total breach of contract
- Rescission or cancellation of the contract in case of fraud
- Restitution for restoring injured party to the original position
- Specific performance where money damages are not acceptable
In consideration of this agreement, under most lease guarantee clauses, a guarantor agrees to guarantee all of the obligations of the tenant under the lease. This agreement gives you a detailed view of the performers of any covenants, all the terms, and obligations.