Becoming a restaurant owner involves an array of important legal decisions. This begins early in the process, as the rental lease for the commercial real estate that will house the restaurant is one of the most important legal documents a restaurant owner will sign. In most cases, the landlord will include a requirement for a personal guaranty, which will assign liability to the restaurant owner under a specific set of terms. For new restaurant owners, limiting a personal guaranty in a restaurant lease can help reduce the risk associated with opening a new business.
Establishing a new restaurant can be a complex process, which is why many new restaurant owners can potentially benefit from working with an experienced hospitality lawyer. At Yates Law, LLC our New Jersey hospitality attorneys assist restaurant owners with a variety of operational and legal matters. Contact our experienced restaurant attorneys today at (551) 237-8921 to learn more about handling a personal guaranty and other related legal matters.
How Does a Personal Guaranty Work?
A personal guaranty is often used in the process of establishing a new business. Both lenders and commercial real estate owners often require a personal guaranty as a form of protection if that the business owner cannot fulfill their financial obligations. A property owner will often require a personal guaranty for businesses that operate at limited liability companies (LLCs) or corporations.
The terms of a personal guaranty will most often apply for the entire term of the lease. Commercial real estate leases typically last between 3 and 10 years, which means that restaurant owners can stay liable years after they no longer own the restaurant. Restaurant owners going through the process of renting commercial real estate should carefully consider the terms of a personal guaranty before signing the document. An experienced restaurant attorney can provide guidance throughout this process.
Factors That Can Affect the Terms of a Personal Guaranty
Ideally, restaurant owners should attempt to eliminate the requirement of a personal guaranty altogether. However, this is often not possible, as it depends on the negotiating power of the owner. The personal guaranty requirement and associated terms will depend on a few different factors, including:
- Whether the restaurant owner is a first-time business owner
- The owner’s past business operational experience, if applicable
- The financial situation and assets of the owner
- The owner’s credit history
- Renovation costs if the landlord has upgraded the rental space
- Current conditions of the rental market
Even if a commercial landlord refuses to eliminate the personal guaranty requirement, prospective tenants may attempt to negotiate different terms. At Yates Law, our restaurant industry lawyers are prepared to assist with limiting a personal guaranty in a restaurant lease.
Unlimited vs. Limited Guarantees
When a guaranty is included in a restaurant lease agreement, it will either be limited or unlimited. An unlimited personal guaranty will require the restaurant owner to fulfill the terms of the guarantee unconditionally for the full term of the lease. Therefore, if the owner defaults in the third year of a 10-year lease, they will remain liable for the remaining 7 years of rent under the terms of an unlimited personal guaranty.
Limited personal guarantees set limits on how much money the property owner can collect from a tenant in a commercial lease and the conditions under which the leaseholder would be considered liable. Restaurant owners and other types of business owners should always negotiate for a limited personal guaranty in situations where a guaranty is required.
Limiting Liability When Negotiating a Personal Guaranty
In situations where a landlord insists on including a personal guaranty in the restaurant lease, restaurant owners should attempt to negotiate terms that limit the guaranty as much as possible. Several different terms can be negotiated to limit the risk of signing a personal guaranty as a restaurant owner:
- A requirement for the restaurant owner to find a new tenant as soon as possible. Once another tenant begins renting the space, the original restaurant owner would only need to pay the difference in rent, if applicable.
- The right for the restaurant owner to assign its lease to a new tenant, transferring the responsibility of paying rent.
- A fixed-term guaranty can limit the terms of the guaranty to a specific number of years, such as the first 2 years of an 8-year lease.
- A limited guaranty can cap the amount of the guaranty, either at a fixed amount or by using a formula.
- Annually decreasing guarantees can be included, based on the idea that the landlord’s risk will decrease each year.
- Good guy guaranty provisions allow tenants to limit liability if they are unable to continue paying rent for the remaining term of the lease. The tenant will need to give the landlord advance notice (3-6 months) and pay rent until the designated departure date, but will not be required to pay rent for the remainder of the lease following that date.
The combination of terms that a landlord may be willing to agree to will vary depending on the history of the prospective tenant and other factors. Some landlords may view restaurants as high-risk, as the National Restaurant Association found that the restaurant industry has suffered the worst sales losses since the beginning of the pandemic. Restaurant owners looking for assistance with negotiation should consider speaking with an experienced hospitality industry lawyer.
When is a Guaranty Unenforceable in New Jersey?
There are certain situations in which a personal guaranty may be deemed unenforceable by the court. A few past New Jersey court cases have set precedent on this matter. In the case United States Rubber Co. v. Champs Tires, Inc., the court ruled that a guaranty is enforceable only if the language in the terms was clear and unmistakable.
How a New Jersey Hospitality Lawyer Can Help Restaurant Owners Limit a Personal Guaranty
Whether establishing a restaurant for the first time, expanding into a second location, or simply moving from one venue to another, restaurant owners should consider every detail before agreeing to a personal guaranty. Agreeing to a favorable set of terms can help greatly limit the risk associated with opening a new restaurant. For many new restaurant owners, an experienced hospitality industry attorney can offer assistance throughout this process, including limiting a personal guaranty for a restaurant lease.
If you are in the process of securing a commercial rental space for a restaurant and have questions regarding a guaranty or another part of the process, the New Jersey restaurant lawyers at Yates Law, LLC are here to provide answers. Contact us at (551) 237-8921 to learn more about personal guarantees and other legal aspects of owning and operating a restaurant.