Personal Guarantees in Commercial Leases: What Ontario Business Owners Should Know

Many commercial landlords require business owners to provide a personal guarantee when signing a commercial lease. While this requirement is common, business owners sometimes underestimate the legal and financial consequences of agreeing to personally guarantee the obligations of their company.

A personal guarantee can significantly increase a business owner’s risk exposure. Before signing a commercial lease that includes a personal guarantee, tenants should carefully review the scope of the guarantee and understand the potential liability involved.

What Is a Personal Guarantee in a Commercial Lease?

A personal guarantee is a contractual provision in which an individual agrees to be personally responsible for the obligations of a tenant under a commercial lease.

Even if the tenant is a corporation or limited liability entity, the landlord may require a director, shareholder, or business owner to personally guarantee the lease.

This means that if the business fails to meet its lease obligations, the guarantor may become personally liable for:

• unpaid rent

• additional rent or operating costs

• damages arising from breach of the lease

• legal costs incurred by the landlord

In many cases, the guarantee effectively removes the liability protection that incorporation would otherwise provide.

Why Landlords Require Personal Guarantees

Landlords commonly require personal guarantees to reduce their financial risk.

New businesses and smaller companies may have limited operating history or assets. By obtaining a personal guarantee, the landlord gains additional assurance that lease obligations will be satisfied even if the tenant’s business encounters financial difficulties.

From the landlord’s perspective, the guarantee provides another avenue for recovering losses if the lease is breached.

Scope of Liability Under a Personal Guarantee

The extent of a guarantor’s liability depends on the specific language of the lease and guarantee.

Some guarantees are limited, while others may expose the guarantor to significant liability.

Personal guarantees may cover:

• the entire lease term

• unpaid rent and operating costs

• damages arising from early termination of the lease

• costs associated with re-leasing the premises

In some cases, liability may extend for several years depending on the remaining lease term.

Because commercial leases often run for five or ten years, the potential financial exposure can be substantial.

Limited Guarantees and Risk Mitigation

In some situations, it may be possible to negotiate limitations on a personal guarantee.

Examples of potential limitations may include:

• limiting the guarantee to a specific dollar amount

• limiting the guarantee to a portion of the lease term

• reducing liability after the tenant has demonstrated financial stability

• removing the guarantee after a certain period of successful tenancy

These types of limitations may help reduce the risk to the guarantor while still providing some security to the landlord.

Multiple Guarantors

Where a business has multiple owners, landlords may require more than one guarantor.

In these situations, the guarantee may be structured so that each guarantor is responsible for the full obligations of the tenant.

This means that a landlord may pursue any one guarantor for the entire amount owed under the lease if the tenant defaults.

Business partners should carefully review guarantee provisions to understand how liability is allocated between them.

Why Legal Review of Personal Guarantees Matters

Personal guarantees can expose business owners to significant personal liability if a commercial lease is breached.

Before agreeing to a guarantee, tenants may wish to obtain legal advice to ensure they understand:

• the scope of their potential liability

• the duration of the guarantee

• whether limitations or modifications may be negotiated

Carefully reviewing the guarantee provision before signing can help business owners make informed decisions and manage their risk exposure.

Speak With a Lawyer Before Signing a Commercial Lease

Business owners reviewing a commercial lease that includes a personal guarantee should carefully consider the potential risks before signing.

If you are reviewing a commercial lease or negotiating the terms of a personal guarantee, you can Book a Consultation to discuss your situation and determine the appropriate next steps.