What to look for in a well drafted commercial lease agreement and personal guarantee
Many legal issues and problems between commercial landlords and their tenants can be avoided or easily resolved if the underlying relationship is based on a well-drafted commercial lease and personal guarantee. As with all contracts, a lease agreement and personal guarantee only matters when there is a dispute, so even if your company has been using the same agreement for a long time, if it has never been tested in court, it may not provide you with the kind of legal rights you really need to easily win a collection lawsuit.
In this writer’s opinion, it is a mistake to use a form you pull from the internet to use as your lease without having the lease reviewed by a real estate attorney. Even commonly promulgated form leases, like the quite well written Commercial Lease by the Texas Association of Realtors, frequently must be amended based on negotiations, and there are some serious traps that can make enforcement of the lease legally impossible or very difficult if changes are made incorrectly. In any commercial lease, there must be:
- Clear terms offered. The rental rate, any other rents that must be paid such as common area maintenance, taxes, insurance, and utilities, and the length of the lease must be set forth with no typos or errors.
It is depressingly common for this attorney to review leases with several handwritten revisions written over the typed terms such that the actual rental rate, length of the term, and negotiable items such as months of free rent are not clearly set forth, leading to disputes.
- Clear acceptance of terms. Most often acceptance of terms is done by a signature of the tenant at the end of the lease. It is recommended, but not required, that the tenant’s signature is notarized. It is similarly recommended, but not required, that the signature block include not just a signature line, but also a printed or typed tenant name, tenant address, and tenant phone number.
If the tenant is a business, it is critical that the business is named correctly in the lease. It is common for this attorney to review leases listing “Mom & Pop, Inc.” as the tenant when that entity does not legally exist, and the tenant should actually be “Mom and Pop, doing business as Mom & Pop, Inc.” And again, if there are handwritten revisions or amendments, it is especially important that there is acceptance of those terms by both sides, typically indicated with initials.
- Default and remedy provisions. While many other aspects of the lease are important, in the context of recovering money from a tenant that has defaulted on the lease, abandoned the premises, or otherwise caused you to need to enforce the lease in a court of law, a well-drafted commercial lease will include several specific provisions of default, and remedies will specifically include acceleration of the remainder of the rental term, attorneys’ fees, and disclaimers against alleged waivers by the landlord.
When offering a prospective tenant a commercial lease, the property owner and property manager must decide whether they will require the tenant to sign a personal guarantee. Typically, a big-box store or similar national brand are considered “credit tenants” meaning that their size and finances are such that the owners of a new Wal-Mart will not need to personally guarantee that the new Wal-Mart will pay its rent. However, with more “Mom & Pop” tenants, it is wise for a commercial property owner or manager to require that they execute a personal guarantee. Similar to the lease agreement, while a form taken from the internet might look good, it is worth having a competent real estate attorney review the prospective guarantee or draft a custom one to ensure that it is enforceable if a lawsuit is necessary. A few things to look out for in a guarantee:
- It should be specifically as to an individual, not a corporate entity;
- It should not include an interest rate or similar interest type penalty as that may convert the document to a promissory note as a matter of law, which has more legal requirements and is easier to challenge in court;
- It should be obviously and clearly linked to the obligations under the lease to pay rent and other charges;
- It should include similar default and penalty provisions as the lease, including the award of attorneys’ fees, upon breach of the personal guarantee;
- It should be clearly signed by the individual and the signature block should include a typed or printed version of the individual’s name;
- It should be signed before a notary by the individual guarantor;
With a well-drafted commercial lease agreement and personal guarantee, your legal rights will be protected. Check out our other blog post “My commercial tenant abandoned or “walked” its lease, what are my rights?” for information about how to actually use these contracts in a dispute.
If you are a commercial property owner, commercial property manager, a broker, an agent, or a prospective commercial tenant and have questions about a commercial lease, call Waranch & Nunn today to set up a free consultation. If you or your company would like assistance in the drafting or review of a form lease for you or your company, give us a call. If you would like assistance in the drafting or review of a custom lease for a specific project, give us a call.