Don't sign life away

Small-enterprise owners are being advised to bargain while Auckland commercial space is plentiful. Photo / Supplied

Business owners are being warned not to sign unlimited personal guarantees on their leases, after a couple received a $450,000 rent bill for a business they sold five years ago.

The current owner of the business has skipped out on the landlord, who is now claiming against the personal guarantee the couple gave on the still-ongoing lease.

There has been at least one other owner of the enterprise in between. If the landlord's claim is successful, the original owners will be bankrupted.

Business broker Paul Devcich says the situation is not uncommon.

Up to 95 per cent of small- and medium-enterprise [SME] owners probably had no idea that the guarantee they signed on a lease for their premises was good for the lifetime of the agreement, he said.

"No matter how many times the lease has been assigned to a new tenant [who has] become a guarantor, if someone defaults on the lease the landlord can come back on anybody."

He and partner David Newport, who run business broking agency Switch Business, are advising firm owners to bargain.

If a business had had several owners, it was not necessarily the last person who got the demand for back rent, Newport said. "Lawyers will go for who has the most money."

In the present environment, where a lot of commercial space was empty, those buying a new business and having a lease assigned to them should try to negotiate a new deal with the landlord. Only sign a personal guarantee if you absolutely have to, the brokers said.

"At present the tenant has the power because there are landlords out there hurting," Devcich said.

Deborah Miller, a property law specialist with Brookfields, agreed tenants had more negotiating power at present. "Certainly until recently the Auckland office market is a perfect example of that.

"People shouldn't automatically sign a personal guarantee," Miller said. "Think about it when you start and try to negotiate to cap it or limit it."

In more savvy commercial arrangements the tenant would give a bank guarantee to the landlord, whereby they were required to have an amount such as six months' rent on standby. Their bank charged a nominal fee for guaranteeing it.

These were becoming more common, although it was difficult for small businesses, especially start-ups, to find that kind of money, she said.

Alternatively, sometimes personal guarantees could be capped at one or two years.

"It depends on the market. Some landlords will just say no, others are in it to help their tenants as well."

James MacCormick, leasing director for Colliers, said corporate tenants in large commercial office buildings used bank guarantees to secure their leases. In the case of multinationals, sometimes a parent company guarantee was used. "It's where you're dealing with smaller organisations and private landlords that things get pretty murky."

Phil Laird, managing director of West Auckland leasing firm Commercial West, said negotiations depended on the relative strength of the parties.

"If a landlord is in a strong position they probably won't proceed without a personal guarantee, it's as simple as that.

"If the landlord's had the property empty for 12 months they may well be softer, to achieve that tenancy."

The experts say

* Avoid signing a personal guarantee if you can.
* Consider other options such as a bank guarantee.
* If you have to sign try to limit it to one or two years.
* If you're buying a business try to negotiate a new lease with the landlord.