Most franchise agreements and commercial leases require individuals to sign a personal guarantee.  By signing one, you agree to be personally and individually responsible for all obligations under the contract.  

     This means that if the business fails to meet its obligations, the guarantor - not just the company - can be held liable.  As such, even if you have formed a corporation or limited liability company, the franchisor or landlord can long beyond those corporate formalities to the guarantors personally.    

     Personal guarantees cany apply broadly, as they can cover monetary obligations as well as commitments to take, or refrain from taking, specific actions.  In other words: if the business breaches the contract in any way, the guarantor may be personally on the hook.

     Personal guarantees in franchise agreements typically cover all monetary requirements, including: royalty fees, brand fund contributions, technology and system fees, non-compliance fees, interest, attorneys’ fees and costs, liquidated damages (these clauses predetermine certain amounts a franchisee, and therefore the guarantor, must pay if the agreement is terminated early or if certain breaches occur), among other types of damages.  Similarly, personal guarantees in commercial leases usually cover all payments due under the lease, such as: base rent, percentage rent (if applicable), common area maintenance (CAM) charges, the landlord’s insurance, real property taxes, interest, attorneys’ fees and costs, accelerated rent  (meaning that if the tenant defaults, the landlord may declare that a certain amount of rent owed for the remainder of the lease term is immediately due), and other types of damages.

     Personal guarantees are not limited to financial commitments, but rather can extend to the breach of any contractual commitments.  For example, in the franchise context, they extend to all operational and contractual requirements, potentially including: operational standards, brand compliance, certain non-compete clauses, and confidentiality provisions. 

     When a personal guarantee is enforced, the franchisor or landlord may pursue the guarantor’s personal bank accounts, Investment accounts, real estate holdings, and other personal accounts.   This exposure makes personal guarantees one of the most significant risks in both franchising and commercial leasing.

     A helpful way to mitigate these risks is to negotiate a limit on the personal guarantee.  One common approach in commercial leasing is a “rolling guarantee,” which basically limits the guarantor’s liability to a fixed amount of rent - often a set number of months - that “rolls” forward during the lease term; for example, if the tenant continues to pay rent and comply with the lease (sometimes after an initial period of time, such as 36 months), the guarantor is liable only for the most recent portion of rent (e.g. 12 months), rather than the entire remaining balance of the lease.  Alternatively, a landlord may agree to a “burn-off guarantee”, which limit the guarantor’s personal liability if the tenant does not breach the lease for a certain identified period of time, after which the guarantor is released from all future rent and obligations.

     In sum, personal guarantees are serious legal commitments with far-reaching consequences.  Before signing a franchise agreement or commercial lease, prospective franchisees and business owners should fully understand the scope of the personal guarantee, the risks involved, and negotiate where possible.  Consulting with an experienced can help clarify obligations and protect personal assets.