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What is a lease guaranty and when should you require one?

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If you are a commercial landlord, you may have encountered situations where your tenant's financial situation is uncertain or risky. How can you protect yourself from losing rent or facing costly eviction proceedings if your tenant defaults or goes bankrupt? One possible solution is to require a lease guaranty from your tenant or a third party. In this article, we will explain what a lease guaranty is, how it works, and when you should consider asking for one.

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1 Lease guaranty basics

A lease guaranty is a legal document that obligates a person or entity, called the guarantor, to pay the rent and perform the obligations of the tenant under the lease, in case the tenant fails to do so. The guarantor can be the tenant's parent company, owner, partner, or another third party with sufficient assets and creditworthiness. The lease guaranty can be either full or limited, depending on the scope and duration of the guarantor's liability. For example, a full guaranty means that the guarantor is responsible for the entire lease term and all the tenant's obligations, while a limited guaranty may only cover a portion of the rent or a specific period of time.

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Eric Clayman

Trusted, Knowledgeable and Compassionate Bankruptcy Attorney
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It is interesting because I am a consumer bankruptcy attorney and in my profession, often a landlord seeks a lease guaranty from a parent or guardian on top of a security deposit. I always counsel those who sign a guaranty to remember they accept all of the liability as if they are the only one who signed the lease. From the landlord's perspective, the more the merrier as if there is a default each of the guarantors are responsible for any outstanding balance caused by the lease default.

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Jakub Ziolek

Partner | Legal Services | Harvard Executive Education | Real Estate | M&A | Foreign Direct Investments | AI in Law
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The guarantee might be granted by the bank, an insurer, or the tenant’s parent company. Bank guarantees are very popular in Poland as a form of lease security. Due to the fact that they are usually irrevocable and payable on first demand, they often replace deposits, which tie up cash.

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Nick Gray

Executive Vice President - Brokerage Services - Creek CRE
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Lease guarantees are a very strong requirement in our market in a post-COVID world where many tenants defaulted. Most owners ask for one but you have options. If you are an established company with good financials you can get around a guarantee being required if you have a good history of strong company financials. If the tenant is a brand new established LLC then a guarantee is almost always required because landlords have no recourse if a new LLC defaults on a lease. Guarantees are even more required if a landlord is offering tenant improvement allowance to improve the space or offering any other incentives like free rent.

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Adriana Rosillo

Trusted South Florida Commercial Real Estate Expert - Specializing in Office & Warehouse Solutions | Your Guide to Buying, Selling, & Leasing Spaces #OfficeSpace #WarehouseFlorida #CRE
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A lease guarantee acts as a safety net in commercial leasing. It gives Landlords peace of mind, especially when dealing with new businesses with limited credit history, tenants with unstable finances, or those in high-risk industries. It is a great tool to mitigate financial risks and ensure rent payments, which is a big draw for startups. This is an excellent alternative to new companies that can not provide a large security deposit. Having said this, I advise against personal guarantees when I represent tenants.

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2 Benefits of a lease guaranty

A lease guaranty can provide several benefits for a commercial landlord, especially in a competitive or uncertain market. First, it can reduce the risk of non-payment or default by the tenant, since the landlord can enforce the guaranty against the guarantor if the tenant fails to pay or perform. Second, it can increase the landlord's bargaining power and flexibility in negotiating the lease terms, such as rent, security deposit, improvements, and concessions. Third, it can enhance the landlord's credit and financial position, since the guarantor's assets and income can be counted as additional security and income for the landlord.

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3 Drawbacks of a lease guaranty

A lease guaranty can also have some drawbacks for a commercial landlord, depending on the circumstances and the parties involved. First, it can complicate the lease negotiation and drafting process, since the guarantor may have different interests and demands than the tenant, and the landlord may have to deal with multiple parties and documents. Second, it can create legal and practical challenges in enforcing the guaranty, since the guarantor may dispute or resist the landlord's claims, or may be located in a different jurisdiction or state. Third, it can affect the landlord's relationship and communication with the tenant, since the tenant may feel less accountable or motivated to comply with the lease terms, or may resent the landlord's interference or pressure.

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4 When to require a lease guaranty

When deciding whether or not to require a lease guaranty, a commercial landlord should evaluate each situation on an individual basis. Generally, a lease guaranty is more likely to be requested in the following scenarios: when the tenant is a new or unproven business, has a weak financial history, or is owned by a wealthy individual; when the lease term is long or the rent is high; or when the market is volatile or competitive. Additionally, if the landlord has invested heavily in the tenant or granted significant concessions, a guaranty may be necessary.

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Amanda Heismann Gray, CPM

Associate Director of Operations | MBA Candidate, Class of 2025
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I would also consider when there are subsidiaries or affiliated companies. Landlords may request a third-party guarantee from a parent company or a financially stronger affiliate to ensure that lease obligations are honored and are not buried in shell corporations.

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5 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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What is a lease guaranty and when should you require one?

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5

1 Lease guaranty basics

2 Benefits of a lease guaranty

3 Drawbacks of a lease guaranty

4 When to require a lease guaranty

5 Here’s what else to consider

Commercial Real Estate

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What is a lease guaranty and when should you require one?

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5

1 Lease guaranty basics

2 Benefits of a lease guaranty

3 Drawbacks of a lease guaranty

4 When to require a lease guaranty

5 Here’s what else to consider

Commercial Real Estate

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