As a lawyer who works regularly with Dentists on their offices lease, I proactively bring up and discuss the existence and impact of a personal guaranty on a dental office lease. The purpose of this post is to answer some of the most common questions I receive from my dental clients related to personal guarantees on dental office leases. My goal is to provide practical tips dentists can use when considering lease negotiations.
Personal Guaranty of a Dental Office Lease
Q. What am I personally guarantying?
A. You are guarantying payment of all the Tenant’s obligations under the lease including rent payments throughout the remainder of the term, common area maintenance costs throughout the remainder of the term, collection costs on behalf of the landlord (including attorney’s fees). When it comes to a lease, the tenant and the guarantor are most often in the same liability position when it comes to liability for the Tenant’s lease obligations unless a cap or limit on the guaranty is agreed to. As in, if you guaranty a lease, you are most likely on the hook for all the Tenant’s obligations under the Lease.
Q. Can I enter into a lease agreement without a personal guaranty?
A. Yes, but for most leases the Landlord will require a personal guaranty if the Tenant doesn’t have a long leasing history with strong financial statements. Sometimes Landlords don’t ask for them, but as a rule, you should plan to be ready to negotiate the personal guaranty. Sometimes Tenants can deposit a substantial security deposit, or, on rare occasions, a letter of credit can be used as security for the Tenant’s performance. Today it is more likely than not that a personal guaranty will be required for a guarantor to enter a lease without a personal guaranty. This is especially the case if the landlord is paying for a tenant improvements allowance and a brokerage commission. If you are a large national company, or have solid financial performance, it’s possible the landlord won’t require a personal guaranty.
Q. How can I minimize my personal exposure if a Landlord wants a personal guaranty?
A. Ask for a cap on the guaranty. Make the case to the landlord that dental offices rarely default on their loans and leases. When negotiating a personal guaranty, you can also try to cap the guaranty at the landlord’s out of pocket expenses including broker fees. The landlord’s contribution to the leasehold improvements plus any brokerage fees are then generally amortized over the term of the lease and your liability under the guaranty decreases over time.
Q. My landlord wants a large security deposit – is this a form of a personal guaranty?
A. A security deposit is one of the ways landlords get security for Tenant’s performance. It is sometimes used in combination with a limited guaranty. Many times, a landlord will require a security deposit of up one to three months of the lease value. This is also negotiable, which is why you need an experienced real estate lawyer to help you.
Q. Why is it important to work with a lawyer on dental office lease negotiations?
A. Letters of intent and term sheets prepared by brokers often kick the guaranty issue down the road until it gets to the lease negotiation, and it often comes up at lease review. An experienced dental real estate attorney knows how to negotiate a guaranty.
Q. How do improvements, broker fees, and rent play a role in determining a personal guaranty?
A. Landlords think in terms of their cash out of pocket to successfully get a tenant into the space. If you add the broker fee, free rent, and tenant incentives, the total is money the landlord is spending out of pocket to put the tenant into the space. At minimum the landlord will want to recover their out of pocket costs before thinking about limiting the personal guaranty.
Q. What advice do you have for a dentist looking at leasing new space?
A. There are several tips including:
- Hire a dental-specific real estate broker – free to the tenant because the landlord pays
- Hire a lawyer with dental industry experience after the Letter of Intent has been signed
- Talk to a dental-specific banker who can help finance the build-out
- Hire architects and contractors who have demonstrated experience in the dental industry
There are many ways dentists can negotiate a personal guaranty on their lease. Working with an experienced real estate lawyer who has a strong focus in the dental industry can pave the way to securing a lease most favorable to the dentist and to his or her practice.