- Joined
- Aug 30, 2007
- Messages
- 24
For those of you investing in commercial properties, I would like to pass along this information from my blog:Negotiating Personal Guarantees - Yes You Can!When the Landlord delivers a Personal Guarantee to be signed, a common response is a free autograph from the Tenant. What you need to know is that as a Tenant, your autograph may be worth more than that. Like any other aspect of a contract, the terms of a Personal Guarantee are limited only by your creativity . . . and market conditions.What it is: Put simply, a personal guarantee is "a promise made by an entrepreneur which obligates him/her to personally repay debts his/her corporation defaults on." Here in Alberta, compliance with the Guarantees Acknowledgement Act is required. This act is generally in place to protect the ordinary citizen from unknowingly getting into a world of hurt, the extent of which he/she did not properly appreciate when he entered into the undertaking in question, and means you will need to appear before a Notary Public, which is covered below.
The Purpose: In a lease transaction, the landlord may require it to secure rent payments, or repayment of a loan made to the tenant, or possibly to make the tenant responsible for any significant improvements the landlord is paying for. If the tenants` business goes under, the guarantors will still be personally responsible for the amount guaranteed.
Is it Mandatory? Not always. There are two major factors that increase the bargaining power of the tenant in avoiding the guarantee; covenant, and market conditions.
Covenant is the perceived financial strength and ability of the tenant to pay the rent (Mark Blayney, "Selling Your Business for All It`s Worth"). During the negotiation process the tenant can demonstrate strong covenant through past and current business success, reputation, a strong business plan, and of course, cash in the bank doesn`t hurt. A landlord may remove the requirement for a guarantee, or at least limit it, for a tenant with strong covenant.
If market conditions heavily favor the tenant, like everything else, the tenant will have more leverage in having a guarantee requirement removed or limited. The market must be fairly unbalanced for this to occur - the landlord will need substantial motivation before waiving certain guarantees. At the time of writing this, Edmonton`s industrial market is fairly balanced, and most negotiation will be focused around the covenant of the tenant.
Is it a Good Idea? Like all negotiations, all sides must be taken into consideration - do not overlook the need to build rapport, and the value of a long-term business relationship. If you are a landlord, I would generally advise you to require one for: rent payments from tenants with weak covenant, substantial improvements made to the tenant`s space, and absolutely for any loans made to the tenant. I would similarly advise some leniency when dealing with strong tenants, or weak market conditions.
If you are a tenant, it is worth negotiating a reduction in your liability. However, if you are a tenant with weak covenant, and the market conditions are not on your side, your willingness to provide a personal guarantee can strengthen your case and demonstrate faith in your cause.
What you can negotiate: Aside from negotiating the existence of the guarantee, there are no limit to the number of ways you can limit the guarantee - an open mind and some creativity will go a long way. Here are a few common methods.
Notarizing the Guarantee: As previously mentioned, in the province of Alberta all personal guarantees must be evidenced by a Notary Public, and the Notary Public must verify that you understand what you are getting into. In Alberta, lawyers, students-at-law, judges, members of the House of Commons, members of the Legislative Assembly, and members of the Senate who were residents of Alberta at the time of their appointments are automatically Notaries Public.
There is a fee to have your document notarized, at the time of writing, a $100.00 fee is common in the Edmonton area. If you have a lawyer on your team with whom you have a good relationship - perhaps they will offer you a stamp in exchange for lunch. If you are using a real estate associate to handle your transaction, they may have bought enough lunches for lawyers to get the odd free stamp as well . . .
Disclaimer: I am a real estate associate licensed in the province of Alberta, not a lawyer, and this white paper is not intended to provide legal advice. Please consult with your lawyer for counsel specific to your situation.
The Purpose: In a lease transaction, the landlord may require it to secure rent payments, or repayment of a loan made to the tenant, or possibly to make the tenant responsible for any significant improvements the landlord is paying for. If the tenants` business goes under, the guarantors will still be personally responsible for the amount guaranteed.
Is it Mandatory? Not always. There are two major factors that increase the bargaining power of the tenant in avoiding the guarantee; covenant, and market conditions.
Covenant is the perceived financial strength and ability of the tenant to pay the rent (Mark Blayney, "Selling Your Business for All It`s Worth"). During the negotiation process the tenant can demonstrate strong covenant through past and current business success, reputation, a strong business plan, and of course, cash in the bank doesn`t hurt. A landlord may remove the requirement for a guarantee, or at least limit it, for a tenant with strong covenant.
If market conditions heavily favor the tenant, like everything else, the tenant will have more leverage in having a guarantee requirement removed or limited. The market must be fairly unbalanced for this to occur - the landlord will need substantial motivation before waiving certain guarantees. At the time of writing this, Edmonton`s industrial market is fairly balanced, and most negotiation will be focused around the covenant of the tenant.
Is it a Good Idea? Like all negotiations, all sides must be taken into consideration - do not overlook the need to build rapport, and the value of a long-term business relationship. If you are a landlord, I would generally advise you to require one for: rent payments from tenants with weak covenant, substantial improvements made to the tenant`s space, and absolutely for any loans made to the tenant. I would similarly advise some leniency when dealing with strong tenants, or weak market conditions.
If you are a tenant, it is worth negotiating a reduction in your liability. However, if you are a tenant with weak covenant, and the market conditions are not on your side, your willingness to provide a personal guarantee can strengthen your case and demonstrate faith in your cause.
What you can negotiate: Aside from negotiating the existence of the guarantee, there are no limit to the number of ways you can limit the guarantee - an open mind and some creativity will go a long way. Here are a few common methods.
- Cap the amount
- . There is no rule stating that the amount guaranteed must be equal to the value which is being risked by the landlord.
- Joint & Several Liability. If there are multiple partners involved in the business, the landlord may require joint and several liability - which means the landlord can chase after any partner for the full amount. You can attempt to have your personal liability reduced to your percentage of the partnership, or another compromise is to propose liability for 150% of your pro-rata share. IE: if there are three partners, each partner is liable for about 48% (150% X 33%) (Jonathan A. Goodman, "Limited Guarantees").
Notarizing the Guarantee: As previously mentioned, in the province of Alberta all personal guarantees must be evidenced by a Notary Public, and the Notary Public must verify that you understand what you are getting into. In Alberta, lawyers, students-at-law, judges, members of the House of Commons, members of the Legislative Assembly, and members of the Senate who were residents of Alberta at the time of their appointments are automatically Notaries Public.
There is a fee to have your document notarized, at the time of writing, a $100.00 fee is common in the Edmonton area. If you have a lawyer on your team with whom you have a good relationship - perhaps they will offer you a stamp in exchange for lunch. If you are using a real estate associate to handle your transaction, they may have bought enough lunches for lawyers to get the odd free stamp as well . . .
Disclaimer: I am a real estate associate licensed in the province of Alberta, not a lawyer, and this white paper is not intended to provide legal advice. Please consult with your lawyer for counsel specific to your situation.
