by Lisa Brennan

When entering into a new lease, business agreement or securing a loan, you might be asked to sign a personal guaranty. This is a big legal commitment that can have serious implications, and it’s essential to understand what you are agreeing to before signing. The following is a guide to the key considerations you should keep in mind when faced with signing a personal guaranty.

What is a Personal Guaranty?

A personal guaranty is a promise made by an individual to personally repay a debt or fulfill an obligation of another person or business. These are frequently required by lenders or landlords to mitigate their risk, especially if the borrower (or tenant in the case of a lease) is a new business. For a business owner, this essentially puts your personal assets on the line in case of default.

Key Considerations Before Signing

1. Scope of Guarantee: Carefully review the scope of the personal guaranty. Does it cover the entire amount of the loan or just a portion, for example? Make sure you understand precisely what you’re agreeing to. For example, most commercial leases will make you responsible for all obligations under the lease agreement – this could include payment of rent, late fees, and other fees that might become due under the lease. It could even include other obligations, such as tenant maintenance responsibilities.
2. Assess Your Own Financial Exposure: Evaluating your business plan alongside your personal financial situation can be helpful.  By doing so, you can determine the extent to which your personal assets could be at risk. In the event of default, these personal assets, along with your business assets, could be used to satisfy the debt. Consider not just your own assets, but also your family’s assets. This is particularly important for married couples to assess together, as jointly held assets could ultimately be reached by a creditor under certain conditions. This could impact your credit and your ability to qualify for other loans in the future.
3. Review the Terms and Conditions. Guaranty agreements are typically designed by lenders and landlords to maximize your responsibility. A few things to look for might be:
   1. Duration: Check how long the personal guaranty will remain in effect. Some guaranties are indefinite or have long-term implications, so it is important for long-term planning purposes.
   2. Release Conditions: Are there certain conditions where you can be released from the guaranty? Lease agreements may require that you continue to serve as the guarantor of the lease even after you have sold your business and assigned your lease to another party, for example.
4. Legal Recourse: It is helpful to know what options you would have if the guaranty is called upon, and if you cannot fulfill your obligations. Understanding how disputes will be handled and what legal remedies are available to you are something that attorneys at Way Law can help you with this part.
5. Written Agreement: Any guaranty is required to be in writing in order to be enforceable. Ensure that the personal guaranty is documented in writing and includes all agreed-upon terms.

Signing a personal guaranty is a significant financial commitment to your business that should not be taken lightly. By thoroughly understanding the obligations and evaluating your financial exposure, you can make an informed decision for yourself and your business. Remember, a personal guaranty not only impacts your current financial situation, but can also have long-term consequences. The attorneys at Way Law can help you understand the legal implications of your personal guaranty, and more importantly, work to ensure that the terms are fair and in your best interest.