The real estate (Lease) personal guarantee form is a document that confirms a guarantor also referred to as a co-signer, decision to guarantee a lease and assume liability if the tenant does not pay the rent or fails to fulfill the terms of the rental lease agreement. It is to be completed by the guarantor who agrees to take responsibility and pay for any unfulfilled obligations. Both the co-signer and the tenant are equally liable and answerable to honor the lease agreement.
A rental or lease agreement is a formal document that delineates the deal between an owner of a real estate, known as the “landlord” or “lessor“, and an individual or an entity ready to pay rent while residing in the property, known as the “tenant” or “lessee“.
In other words, it is a document used for renting out a property, either commercial or residential, for a specific period in return for monthly rent. The terms of the contract are open-ended between the tenant and landlord. After the agreement is signed, the form is considered legally and mutually binding.
Recovery of rent and losses is a priority for landlords. Landlords, therefore, consider getting security from tenants. The real estate (lease) personal guarantee form template is a valuable tool to obtain a guarantee.
Note: According to the lease personal guarantee form, the landlord is not forced to get the rent from the tenant first. Instead, the landlord can charge rent against the guarantor under the obligation guaranteed under the lease guarantee personal form.
Significance of Personal Guarantee Form
The importance of attaining a personal guarantee form is that most guarantors have assets the landlord could target if the lessee fails to make lease payments, and the guarantor repudiates to make the payments as agreed. Businesses are more liable to take chances and make uncertain business decisions if there is no personal liability for the lease payments.
When the business owner is made personally liable for the lease payments, this ensures that the business will be more directed more towards making timely lease payments.
In addition, the tenant is likely to cause less damage to the building when the guarantor has taken responsibility for any damage. Finally, by requiring a personal guaranty, the business focuses on making rental payments against paying other obligations that are not personally guaranteed if the business encounters financial distress.
Usually, a tenant has just started a new job and has a low salary. They have no credit history and low credit scores. It’s very advantageous for him to opt for a personal guarantor. Having a co-signer on your lease agreement gives the tenant peace of mind that there is someone to back him in times of financial distress. Besides, having a personal guarantor favors the tenant as the landlord may even lower the rent as he has the additional assurance that the rent will be repaid.
The parties involved in the real estate (lease) personal guarantee form are the tenant, guarantor or co-signer, and the landlord. After negotiation among all the concerned parties, they reach an agreement. Then, after all the hurdles are solved and a consensus is reached, comes the legal process in which terms and conditions are formulated according to the laws and regulations. It is a time-consuming and challenging process in which all the concerned safeguard their rights.
The following are the involved parties:
A tenant is a person who lives on the property of another person in return for a rent amount. After reaching a consensus, the tenant has to sign a lease or rental agreement. In addition, the tenant has to pay the rent on time, keep the premises clean, and not damage the premises.
A guarantor takes total liability for paying the rent along with the tenant. A guarantor is usually a family member. The guarantor is obligated to pay any missed rent payments and any unfulfilled obligation on the part of the tenant. The guarantor’s credibility can be harmed if the tenant is late in making payments.
A landlord is a person who possesses property, like an apartment, house, land, or real estate. In return for rent payment, such properties are leased or rented to other parties, referred to as tenants.
The Procedure of Giving Personal Guarantee
The landlord may require business owners or individual tenants to provide a personal guarantee to secure finances for rent with the help of a personal guarantee form. If the tenant has inadequate finances or the company is a startup or has a bad credit history. Usually, for a tenant, the guarantor is a relative or a close friend.
In both cases, when a personal guarantee is given, the company owner should pledge his assets and agree to assume liabilities from personal capital if the company defaults. In both residential and commercial, the guarantor should show his assets from which the liabilities are to be paid in case of default.
Components of the Form
A personal guarantee form is a legal document that must be filled with great precision. All information regarding the concerned parties should be written appropriately and rechecked before the final approval.
The following are the important components of the form:
The date of the lease contract
The date means the date the lease agreement document has legal effect as determined by the date of the last signature. All the concerned parties must sign every page of the lease document.
The full name of the landlord should be written as it appears in the original lease. For verification, a photo ID like a driving license or passport must be attached.
Address of the landlord
Official mailing address where the landlord can be contacted regarding the lease must be present on the personal guarantee form. His mobile contact number and his email address.
The tenant’s name, which appears in the original lease, must be documented in the personal guarantee form. Also, a photo ID like a driving license or passport.
The execution date of the lease and personal guarantee form is the date when all the concerned parties sign the agreement. The day when the lease agreement becomes effective is the effective date (or contract effective date), which can be different from the execution date. The effective date is when your obligations delineated in the agreement begin.
Perils of Personal Guarantees
Acting as a Good Samaritan and helping your relative, but by doing so, the guarantor accepts a significant financial risk and responsibility while the tenant enjoys the benefits. The guarantor is responsible for paying the loan. If the tenant misses a payment, it’s the guarantor’s liability to cover it out of his pocket and bear the consequences according to the personal guarantee form.
Following are some risks and dangers of personal guarantees:
Loan appears on your credit reports
This new loan appears on the guarantor’s credit reports, along with any black marks connected with it, like late payments, defaults, and missed payments.
It can affect your ability to get a loan
Taking on any additional debt increases your debt-to-income ratio. This doesn’t directly affect the guarantor’s credit scores. However, the debt-to-income ratio is a crucial factor used by banks to evaluate whether to dispense credit and on what terms.
Your credit could take a nosedive
If the tenant stops paying on the loan/rent, and the guarantor does not pay the missed payments, the landlord/lender will report the missed payments or loan default to the credit bureaus. And this can affect the guarantor’s credit reports, which can damage his credit scores.
The guarantor is legally on the line
The guarantor is as legally responsible for the rent as the tenant; the landlord may sue the guarantor if the rent goes unpaid. The court could order the guarantor to pay 100% of the debt and legal fees. And retrieval of that cash might force the guarantor to sue the tenant.
The guarantor is stuck with the loan
In general, a guarantor can’t leave a co-signed loan when the tenant defaults. So he is stuck to that debt unless the tenant qualifies for a refinance, assumes the liabilities without the guarantor as a co-signer, or closes the loan.
Negotiating Personal Guarantee on the Lease
Before signing as a guarantor one must think about the potential liability, which could be disastrous if the business/tenant defaults. Therefore, it is crucial to be aware of the consequences of signing a personal guaranty. The guarantor must negotiate the specific terms of the guaranty to limit exposure to the guarantor.
The guarantor has many options. The potential guarantor can refuse to sign any personal guaranty period. If the tenant is financially weak, or the business is a new startup, this may not be possible since the landlord may search for a different tenant, but it is possible.
The guarantor can offer a letter of credit instead of signing a personal guaranty. A letter of credit is a negotiable instrument given by banks to guarantee payment.
In commercial real estate transactions, a tenant can get a letter of credit and propose it to the landlord as security in the event of a default.
To get the letter of credit, the bank will require that the person have assets to offer as collateral or is creditworthy.
The co-signer should negotiate to limit the length or dollar amount of the guarantee.
The guarantor should ask for the expiration of the guaranty if the tenant does not default in the first few years of the lease term.
On the other hand, if the tenant defaults, the guarantor should negotiate for a limited period in which he is liable for payments. He can also deal with a maximum dollar amount that the guarantor will pay if the tenant defaults.
As part of a commercial lease transaction, the co-signer should negotiate to delineate the landlord’s duties to mitigate damages in the event of a default. The specific tasks and requirements the landlord must complete to mitigate its damages satisfactorily can significantly improve the guarantor’s situation if the lease is broken.
Through the release of guarantee form, the guarantor is at liberty from being financially and legally bound to a contract. This usually occurs in loan agreements and lease documents after expiration or when the contract has been fully fulfilled.
In the case of a company, the company owner cannot be held liable for any debts incurred after the date of the form. A release of the personal guarantee form declares that the company has fully ended all debt to the account to which the company was tied as collateral. In case of disputes, the company can hire an expert lawyer to remove any ambiguities in the clauses.
The lease personal guarantee form involves the tenant, landlord, and guarantor. The guarantor, by assuming the liabilities of the tenant, is benefiting the tenant. Both the tenant and the guarantor are equally accountable for the payment of rent. The tenant must keep in mind the consequences if he fails to honor the lease agreement.
The backslash could be that the guarantor can also sue the tenant in the event of a default. It could lead to serious legal proceedings against the tenant. Both the guarantor and the tenant must realize their responsibilities and adhere to their part of the deal. Apart from the trouble of legal court proceedings, the tenant’s irresponsible behavior could jeopardize his relationship with the guarantor.