On the Hook: Personal Guaranties
When it’s time to enter into a lease for your dental office space, your practice entity (rather than you, individually) will likely be the tenant under the lease which helps to protect you and your personal assets from the many potential liabilities that your dental practice may have as a tenant.
When it’s time to enter into a lease for your dental office space, your practice entity (rather than you, individually) will likely be the tenant under the lease which helps to protect you and your personal assets from the many potential liabilities that your dental practice may have as a tenant. However, this puts your future landlord in an uncomfortable position – you, as the dentist, represent the earning potential of your practice, not the practice itself. Accordingly, your landlord will often request that you sign a “Personal Guaranty” for your lease to give them some extra assurance that they won’t be left high and dry.
A personal guaranty is a promise that you, individually, will be responsible for the tenant’s obligations under the lease (most importantly, paying rent), if the actual tenant (your dental practice) fails to meet them. For example, if your practice doesn’t pay rent, then you’ll pay it out of your own pocket. The thought of taking on this responsibility might very well make you feel nervous, and rightfully so – this is basically a way to offload some of the landlord’s anxiety about nonpayment of rent directly on to you.
Accordingly, there are ways that you can limit your personal exposure even if you have to agree to provide a personal guaranty and your legal counsel will be able to assist you these negotiations. You may be able to limit the amount for which you’ll personally be on the hook. Some examples of such limitations would be capping your personal liability to a year of rent and/or the amount of improvement allowance which should be amortized, or steadily decreased, over the course of several years. You may be able to have the personal guaranty “burn off” as of certain date. For example, the personal guaranty would be in place for the first five years of your lease and after that five year period of making rent payments, the personal guaranty would terminate.
Because the personal guaranty is a very technical document that can be drafted in multiple ways, we highly recommend getting an attorney involved to make sure that these finer points are taken care of. As with other key lease provisions, this is one that we always recommend providing for in the lease proposal/letter of intent. With some expert care and advanced preparation, you’ll be able to reduce your own lease anxieties and limit your personal exposure.