Should I sign a personal guarantee on a lease?

A guarantee is a written promise to cover the tenant's obligations if it defaults. If your company signs the lease and you guarantee it, the landlord can come to you directly for unpaid rent, outgoings and repair costs, and often legal costs and interest too.

Running the business through a company or trust doesn't protect you here. The guarantee is your personal promise, so your savings, property and vehicles can be at risk, and in serious cases it can lead to bankruptcy.

If there are several guarantors, such as you and a business partner, the guarantee may be joint and several. That means each of you can be liable for the whole amount, not just your share.

Landlords commonly ask for guarantees from small businesses and start-ups without a long track record. There's generally no law stopping them, as long as the terms aren't misleading, deceptive or unconscionable.

It's worth trying to negotiate the terms. Ask for:

• a cap on your liability, such as a set dollar amount
• a time limit, so the guarantee ends when the lease ends rather than continuing into option periods or any holding over
• a release if you sell the business or assign the lease
• a bigger bank guarantee instead of a personal guarantee

Read exactly what the guarantee covers. Some are drafted to include make good costs, the landlord's legal costs and later variations to the lease.

A bank guarantee is the bank's promise to pay the landlord up to an agreed amount if your business defaults. You usually have to give the bank cash or other security to back it, and the landlord can only call on it up to the agreed amount. An uncapped personal guarantee has no such limit and reaches your personal assets more broadly.

Many landlords ask for both. If you're offering a larger bank guarantee to get rid of the personal one, put that trade-off to the landlord directly.

Your guarantee doesn't automatically end when you sell the business. For many commercial leases, the lease and guarantee wording decide, and the landlord may ask you to keep your guarantee in place as a condition of agreeing to the transfer.

Retail shop leases can be different. In NSW and Victoria, for example, retail leases laws release the outgoing tenant and its guarantors from future liability if the correct disclosure process is followed when the lease is assigned with an ongoing business. Miss a step, or include false or misleading information, and the release may not apply.

Retail leases laws differ between states and territories. Depending on where you are, the landlord may have to give you a disclosure statement before you sign: at least 7 days before in NSW and at least 14 days before in Victoria. Small business commissioners, such as those in NSW and Victoria, publish leasing guides and offer mediation if a dispute arises.

The NSW Small Business Commissioner recommends getting legal and financial advice before you finalise a guarantee. A Sprintlaw lawyer can review the lease and guarantee for a fixed fee and suggest changes before you sign.