Commercial Law Gold Coast Update: Personal Guarantees in a Commercial Lease
If you are taking out a commercial lease on premises for at least 3 years, you must ensure that you seek both legal and financial advice before you sign any documentation.
The financial advice should encompass whether you take the Lease out in your own name, the name of an existing entity or a new entity. The purpose of such advice is to provide you with a possible avenue for personal asset protection (as well as tax benefits in having the Lease in a particular entity). This way, if you breach your obligations under the Lease, the Lessor cannot seek to recover any loss from your personal assets.
If you are taking a Lease out in an entity name (ie. A company in its own right or as trustee), and the Lessor requests that the Directors of the entity provide personal guarantees, you can effectively be removing the personal asset protection put in place for you.
There are ways you can potentially avoid giving personal guarantees however seeking legal advice before you sign anything is the only way to ensure that this avenue is explored on your behalf during negotiations. If you sign an Offer to Lease or similar document before you obtain legal advice and it states that you will offer personal guarantees, then you have little to no chance of negotiating out of this requirement. If you obtain legal advice before you sign anything, there is a greater chance of you avoiding the guarantee requirement and continuing on the asset protection vehicle your accountant has set up for you.
To avoid being bound by an Offer to Lease (and subsequent lease) which contains personal guarantees, make an appointment with one of our lawyers before you sign anything and we can provide you with advice as to your legal position. Contact Kristy Collins Associate in the McLaughlins Lawyers Commercial Law team.
Author: Kristy Collins
Partner: Ian Kennedy