Question: My landlord wants the owners of my Arizona medical marijuana dispensary nonprofit entity to sign a Personal Guaranty. What is it and should the owners sign the guaranty?
Answer: A Personal Guaranty is a promise by the guarantor to pay the debt of a third party or to satisfy an obligation of a third party. If an entity such as a corporation or a limited liability company signs a lease for real property, the general rule of Arizona law is that the owners of the entity are not liable for the debts or obligations of the entity, including the rent. Landlords understand the law so a prudent landlord will require the owners of the entity to sign a Personal Guaranty by which the signer becomes legally obligated to pay to the landlord any amounts due under the lease that are not paid by the tenant and to satisfy any obligations of the tenant under the lease that are not satisfied. The landlord usually wants all of the owners of the tenant entity to sign a Personal Guaranty.
Personal Guarantees of leases are not required by Arizona law. Whether or not the owners give a personal guaranty is negotiable with the landlord. In economic times that favor landlords, they almost always require the owners of the tenant entity to sign a Personal Guaranty unless the entity has a satisfactory financial statement. During economic times that favor tenants, i.e., now, the owners of the entity may refuse to sign a Personal Guaranty and a desperate landlord may nevertheless enter into the lease without any Personal Guarantees because the landlord needs the rental income.
Personal Guaranty Negotiating Advice
Here are some negotiating tips for owners of an entity that may reduce their liability for the entity’s defaults under the lease when the landlord insists that the owners sign a Personal Guaranty:
- Reduce the term of the Personal Guaranty. Just because the lease is for five years does not mean the Personal Guaranty must last the same period of time. Try to shorten the term of the Personal Guaranty to some period less than the full term of the lease.
- Don’t guaranty extensions of the lease. If the original term of the lease expires and the entity exercises an option to extend the term of the lease, include language in the Personal Guaranty that it does not apply with respect to any extensions of the lease.
- Limit the maximum dollar amount of the signer’s liability. State in the Personal Guaranty that the maximum amount for which the signer is liable is $50,000 or $100,000 or whatever is the lowest number the landlord will agree to. If the landlord spends the landlord’s money for tenant improvements or for other items required of the landlord, the landlord will almost always want the landlord’s total out-of-pocket expenses to be the signer’s minimum liability.
- If the landlord will agree to limit the signer’s liability to a stated amount, provide in the Personal Guaranty that the amount of the liability goes down each month. For example, if the signer’s maximum liability is $120,000 and the term of the Personal Guaranty is two years, provide in the Personal Guaranty that the signer’s liability goes down $5,000 every month.
- State in the Personal Guaranty that the signer’s obligations terminate as of the date the entity loses its license to operate an Arizona medical marijuana dispensary.
- State in the Personal Guaranty that the signer’s liability terminates if the signer were to die.
- State in the Personal Guaranty that the signer’s total liability is equal to the total liability thereunder divided by the number of other owners who sign a Personal Guaranty. For example, if the entity has four owners who will sign guarantees, state that the signer’s total liability under the Personal Guaranty equals 25% of the total liability.
- State in the Personal Guaranty that if the Arizona Cardinals with the Superbowl, the Personal Guaranty will terminate. A knowledgeable landlord should not have a problem with this because the landlord knows there is almost no chance this will ever happen.
Important Fact About Personal Guarantees & Arizona Community Property
Arizona law provides that a Personal Guaranty signed only by one spouse is not effect against the assets of the non-signer spouse. If the landlord requires that both spouses sign the Personal Guaranty, try telling the landlord that the spouse who is not active in the business refuses to sign a guaranty.