Limiting the Personal Guaranty in Your Restaurant Lease

If you are getting ready to sign a restaurant lease, you are almost certainly being asked to provide the name of someone who will provide a personal guaranty of payment on the lease.  This person, whether it be you yourself, or someone with whom you are associated, will be personally on the hook if the tenant (usually an LLC or some other corporate entity) itself does not pay.  The reason the landlord requires this is because, unless the tenant is a big corporation with a lot of assets separate and apart from this restaurant (and, regardless, we usually advise our clients to set up new entities for every location they open), a personal guaranty is the only way the landlord can have some assurance that you won’t simply walk away from your restaurant (and the lease) if business gets bad.  The landlord wants someone on the hook.

Many restaurant tenants do not realize that they do not have to agree to a full guaranty – i.e., one that will make them liable for all payments due under the lease, for the full term, if there is a default.  On the contrary, landlords will often agree to limit the personal guaranty on on the lease, and thereby limit the personal liability that can result if your restaurant does not succeed.  The two most common forms these limits take are a cap on liability, and a “burn off” provision.  Most common is some combination of the two.

A liability cap means that the guarantor’s liability is capped at some dollar amount or, more commonly, some number of months’ rent due under the lease.  For example, the guaranty could provide that, in the event of default, the landlord’s maximum recovery against the guarantor be (let’s say) 24 months of rent.  This would be true even if it takes the landlord much longer to find a new tenant or incurs significant expenses in securing such a tenant (such as in brokerage fees, rehabbing the space, or in concessions to the new tenant).  One can imagine such a cap being particularly valuable if a restaurant fails early in a long-term (e.g. 10-year) lease.

burn off provision means just that, that the lease guaranty will “burn off” at some point, provided the tenant has met all other requirements under the lease.  For example, a restaurant lease guaranty could provide that, after five years of on time payments by the tenant, the guarantor would have no further liability and the guaranty itself would terminated.

Again, most common is a combination between these two liability limitations.  In one formulation we negotiate for our clients quite often, the liability will be at some amount during the initial years of the lease, then burn off, or “burn down,” as time goes on: perhaps from a full guaranty to 24 months after some number years of on time payments; then from 24 down to 12; and then maybe eliminated altogether.  In this way, a tenant is incentivized to keep paying rent on time (especially early in the lease, when the liability is the greatest), and rewarded for being a good tenant later in the lease.

Of course the specifics of what a landlord will agree to will depend on the financial viability and business history of the tenant, but this all where an experienced restaurant leasing attorney (or restaurant real estate broker) can be immensely helpful.  The limits your lawyer or broker can negotiate for you can make the difference between bankruptcy, and being able to pick your self up and give it another try some time the future.