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Personal Guaranties And How to Avoid or Limit Them – PART TWO
In Part One on this subject we looked at three ways to avoid or limit
personal liability when a landlord asks a tenant for personal guaranties of the tenant
’s compliance with a proposed lease. Those approaches involved trying to
negotiate provisions that (i) eliminate the personal guaranty requirement based on
your company’s financial strength and experience, (ii) limit the period of
the guaranty to less than the term of the lease, or (iii) limit the dollar
amount of the guaranty to some mutually acceptable amount.  Those approaches may
fail and you may be forced to sign a personal guaranty if at the time you enter
into the lease your company does not have a history of financial strength or
foodservice experience satisfactory to the landlord.  What can you do then
particularly when your company is some form of limited liability business entity
such as a corporation or limited liability company?  You might try offering to
substitute a letter of credit for the guaranty, or if your company does not
then satisfy your bank’s criteria for issuing one proposing to include a
provision that gives you the right to do so later.
A letter of credit is a document issued by a financial institution, usually
your company’s bank, that acts as an irrevocable guaranty of payment up to a
preset amount to a beneficiary which in this case would be your landlord, when
some preset criteria are satisfied. For example if the criterion is your
failure to make a required payment, the letter will provide that your landlord is
free to present it to the issuing bank along with a signed statement of how much
you owe. The bank is then obligated to immediately pay that amount to the
landlord. As far as your landlord is concerned the letter of credit makes your
bank the guarantor of your company’s compliance with the lease.  This is very
attractive to most landlords.  
If you have the right to replace your personal guaranty with a letter of
credit then you have a mechanism for shifting your personal liability to your
company.  This will only be possible when your company has achieved sufficient
financial strength for your bank to be willing to issue the letter of credit
because your bank will want some assurance that if it has to make any payments
under the letter of credit your company will be in position to adequately
reimburse it.  By allowing you to substitute such a letter of credit for your
personal guaranty the landlord will not be giving up anything, and in fact will
probably have a stronger guarantor than you.  The advantage to you is that if your
company subsequently builds sufficient financial strength you have a chance to
terminate your personal guaranty and no longer have your personal property at
risk.  An added advantage is that you would no longer have to list the
guaranty as a potential liability on your personal financial statement.  
Banks usually charge an annual fee for issuing letters of credit and
sometimes an application fee as well.  However you need not be concerned about these
fees until you are ready to consider obtaining the letter of credit.  At that
time you can decide whether the fee to be paid by your company is worth the
relief you will get when you terminate your personal liability.
Coming Next: What is a subordination clause, why is one usually found in a
commercial lease, and should it concern you?

HELLER’S LEASING TIPS
By Stuart A. Heller

With over 35 years experience Stu Heller helps his clients understand and
improve their business and leasing agreements.  His website is at
_www.theleasinglawyer.com_ (http://www.theleasinglawyer.com/)  and his office is located at
1325 4th Avenue, Suite 940, Seattle, Washington 98101. He can be reached at
206-623-0579, fax 206-682-7972, heller@theleasinglawyer.com and
hellerlaw@aol.com.  Contact him for a free initial consultation or to get his Leasing Tips
emailed to you.  Be sure to consult your lawyer before applying any of the above
to a particular situation

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