Tenant Credit Worthiness and Lease Guarantees

How does a landlord evaluate whether a tenant they are signing a lease with will be able to fulfill the obligations?

How does a tenant pledge that they will fulfill the lease obligations?  These are the two topics we will discuss in today’s post.

Evaluating Tenant Credit Worthiness is an important, but sometimes overlooked step in the leasing process.  When discussing this topic we will take a landlord centric approach, that will elucidate the issue for any tenant’s out there reading this so they know how they are being evaluated.  To get a handle on a tenant’s Credit Worthiness a landlord might request to look at your business credit by using Dun and Bradstreet, Experian Business, Equifax Small Business or another credit reporting company.  They may rather take a look at recent company financials, and/or business plan; but sometimes—especially with a startup— there isn’t enough of a track record so they will ask for a personal credit report.  None of these items will guarantee a tenant will pay the rent on time each month, but they do give the landlord an idea of the risk they are taking on.

Based on the perceived risk, the landlord will look to secure the lease with a guarantee.  The three main types of guarantees are Person, Corporate, and Good Guy.

Personal Guarantee

A personal guarantee means that an individual is signing the lease and in effect backing it with a guarantee against their personal assets.

Corporate Guarantee

A corporate guarantee means that an individual is signing the lease as an authorized member of a corporation.  In this case the backing to the lease comes from the corporation’s assets.

Good Guy Guarantee

A good guy guarantee—or good guy clause as it is sometimes called—is an offshoot of either a personal or corporate guarantee that typically means the landlord will let the tenant out of their lease early as long as they are current on rent.  Some additional terms to this might be that the tenant has to be current on rent and reimburse the landlord for legal and brokerage fees.  Some good guys have a vesting period.  For example, after two years, if the tenant is current on their rent and reimburses the landlord for a percentage of the amortized cost of legal and brokerage fees, they can walk away from the lease at any time.  The major argument a landlord will make against providing a tenant with a good guy guarantee is that it effectively creates a month to month lease where the tenant can leave anytime.  

If you have any questions about this article or commercial real estate email [email protected] or let me know in the comments below.  Don’t forget to subscribe to our email blasts!

Next week we’ll talk about Regulations and Zoning. Read the post here.