Succeeding in Your Business: Do personal guaranties go on forever?

Cliff Ennico 

“My partner and I bought a small business five years ago from the person who originally started it. We assumed his existing lease for a terrific retail space and personally guaranteed the lease. As we are both getting ready to retire, we decided to sell the business. We found a great buyer, who is willing to pay us an above-market price because of the business location.

“But we’ve hit a big snag, in the form of our landlord, who will not release us from our personal guaranties of the lease even though our buyer has agreed to give his own personal guaranty of the lease. There’s seven years left on our lease, and while we like the buyer we’re not willing to put our houses on the line for that long a period of time.

“What’s even worse, the landlord wants a personal guaranty from the person who sold us this business five years ago. We’ve kept in touch with him, but there’s no way we can ask him to guarantee a lease for someone he doesn’t even know or care about.

“Do you have some ideas as to how we can deal with this situation?”

I represent a fair number of people each year who are buying or selling small businesses, and one thing is universally true: Whenever there’s a problem in a business sale, it almost invariably comes from the landlord of the business premises.

Unlike the seller and the buyer, who are both motivated to get the deal done, the landlord has no incentive to make the deal happen. I’ve heard more than one landlord tell me that “whenever a business changes hands, it inevitably starts going downhill and we have to worry about getting our rent check on time each month.” Also, given the COVID-19 pandemic, a lot of landlords are terrified about tenants defaulting on their rent and are looking for a lot more protection than they did a couple of years ago.

But requiring a personal guaranty from someone who hasn’t been involved in the business for five years? Clearly, this landlord realizes how important the location is to the success of the business and is abusing his or her power in order to squeeze something out of you.

It is unlikely this landlord will release you from your personal guaranties, but you can and should request some protections, such as:

• A “cap” on your personal guaranty obligation to six months’ or one year’s rent.

• A “sunset” clause allowing your personal guaranties to lapse if there is no default under the lease for 12 months after you sell the business.

• A clause in your sale contract allowing you to step in and cure any defaults of the buyer under the lease before the landlord sues you under your personal guaranties.

As for the landlord’s onerous requirement of a personal guaranty from the person who sold you this business five years ago, the first thing you should do is have your lawyer review the “assignment and transfer” section of your lease. There’s a good chance the landlord’s consent to a sale of business “may not be unreasonably withheld or delayed.” If that language appears in the lease, you may be able to use it as a weapon to get the landlord to back off, as this requirement is unreasonable and clearly designed to handicap you in selling your business to anyone.

Your attorney should also look at the guaranty or “suretyship” laws of your state. In many states, a personal guaranty automatically disappears when a business changes hands unless the guarantor reaffirms it in writing. If the original business owner did not specifically reaffirm his guaranty when you bought the business, he is forever released from his guaranty, and any future reaffirmation will be void unless he receives something in return for it (such as money or an equity interest in the business).

Your buyer may be able to get the landlord to back off this requirement by offering an additional one to two months’ security deposit, or some other additional collateral for his own personal guaranty (such as a second mortgage on his home, a lien on the business accounts receivable or a percentage of his monthly gross sales as “additional rent”).

If all else fails, you will have to contact the prior business owner, explain the situation, offer him something (such as a percentage of the money you will receive for selling the business) and offer to “hold him harmless” in the event the landlord ever calls on his personal guaranty. This means that if he is ever sued on his personal guaranty, you will take over the defense of his claim, pay all his fees (including legal fees, if he retains his own attorney) and pay any judgment in favor of the landlord so that the prior owner doesn’t have to shell out a penny of his own money or put any of his own property at risk.

Cliff Ennico (crennico@gmail.com) is a syndicated columnist, author and former host of the PBS television series “Money Hunt.”

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