Do I have to sign a personal guarantee on a commercial lease in Australia?

Nikolina Milošević
2 days ago
4 min read

No, you do not have to sign a personal guarantee on a commercial lease. It is a negotiated term, not a legal requirement. But in practice, most Australian landlords will ask for one, particularly if the tenant is a company, a new business, or a business without a long trading history. Whether you sign, and on what terms, is a commercial decision that should be made with a full understanding of what you are agreeing to.

What a personal guarantee actually means

When a company signs a commercial lease, the lease is between the landlord and the company. If the company cannot pay, the landlord's recourse is usually limited to the company's assets. A personal guarantee removes that limitation. The guarantor, usually the director of the company, personally guarantees the lease obligations.

If the business closes, if rent falls behind, if the lease ends in default, the landlord can pursue the guarantor personally. That includes personal savings, investments, and in some cases the family home.

The purpose of the personal guarantee is to give the landlord a second, and often more valuable, source of recovery.

Why landlords ask for personal guarantees

Landlords use personal guarantees to manage their risk.

A company is a separate legal entity with limited liability. If the company fails, the landlord may be left with an empty premises, unpaid rent, and no one to pursue. A personal guarantee gives the landlord a second avenue for recovery, and puts the director's personal assets on the line to encourage the tenant to keep the lease current even when the business is under pressure.

For landlords, the personal guarantee is one of the most effective security measures in a commercial lease. For tenants, it is one of the most significant risks.

Before you sign a personal guarantee, get the lease reviewed. Book a call with us to get advice on your obligations:

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What you can negotiate

If a personal guarantee is required, the terms of the guarantee are negotiable. The scope, duration, and triggers can all be refined to reduce the tenant's exposure. Options to negotiate include capping the guarantee to a fixed number of months of rent, for example six or twelve months, rather than the full term of the lease, limiting the guarantee to rent only, excluding outgoings, make good costs, and legal fees, limiting the guarantee to specific default events rather than all obligations under the lease, including a sunset clause so the guarantee falls away after a period of consistent payment, requiring the landlord to first pursue the tenant company before calling on the guarantee, and releasing the guarantor on assignment of the lease to a new tenant.

Every one of these positions is commercially reasonable and regularly agreed to by landlords, but only where the tenant knows to ask.

When a personal guarantee can sometimes be avoided

In some cases, landlords will accept alternatives to a personal guarantee. These include an increased bond or bank guarantee for a larger amount, a parent company guarantee from a related entity with strong financials, prepayment of several months of rent, or additional security over other commercial assets.

If you have a strong trading history, a well capitalised business, or you are leasing high value premises in a competitive market, you may have enough leverage to avoid a personal guarantee entirely. It is always worth asking.

What happens if the guarantee is called on

If the tenant defaults under the lease and the landlord calls on the personal guarantee, the guarantor becomes personally liable for the amounts owed. The landlord can demand payment directly, commence debt recovery proceedings, obtain a judgment, and enforce against the guarantor's personal assets.

The process is often fast and the costs escalate quickly, particularly where the guarantee is broadly drafted and includes legal costs and interest. By the time a guarantee is being called on, the tenant is usually already under financial pressure, which makes the personal exposure even more damaging.

Signing a guarantee on behalf of your business partner

If you run a business with a partner and both of you are required to sign a personal guarantee, the guarantee is usually drafted as joint and several. That means each of you is liable for the full amount of the lease obligations, not just your half.

If the business later breaks down and your partner walks away, you may find yourself personally liable for the entire remaining lease, with no practical way to recover from them. The personal guarantee in your lease, and the arrangements between you and your business partner under a shareholder agreement, should always be considered together.

If you are going into a lease with a business partner and want advice, book a Strategy & Advice Consult with us.

Read the guarantee carefully, not just the lease

Personal guarantees are often drafted as a separate document, or as a schedule to the lease. Read the guarantee itself, not just the clause in the lease that refers to it. Pay particular attention to the scope of the obligations, the duration, what triggers the landlord's right to enforce, whether the guarantor's liability survives the end of the lease, and whether the guarantor is liable for outgoings, legal costs, interest, and damages in addition to rent.

The broader the drafting, the greater the exposure. A well drafted guarantee from a tenant's perspective is narrow, time limited, capped, and clear about what it covers.

The bottom line

A personal guarantee is one of the most significant things a business owner can sign, and most people sign without fully understanding the risk. It is not a formality. It is a direct link between the lease and your personal assets.

You do not have to sign a personal guarantee. If one is required, the terms are negotiable. Either way, the time to deal with it is before you sign the lease, not after.

Get your lease reviewed before you sign

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