Personal Guarantees in Commercial Leases: What Ontario Business Owners Should Know

A corporation is generally treated as a separate legal entity from the people who own or run it, which is part of why businesses incorporate in the first place — it limits the owner’s personal exposure to the business’s debts and obligations. For a commercial landlord, that same separation is a risk: if the only party on the lease is a newly formed corporation with no assets, no credit history, and no track record, the landlord has very little to actually collect against if the tenant stops paying rent partway through a multi-year term.

A personal guarantee is the landlord’s way of filling that gap. It’s most commonly asked for when the tenant is a new or small business, a single-location franchise operated through a thinly capitalized entity, or a company whose financials don’t, on their own, give the landlord much comfort. Established, well-capitalized tenants with a longer operating history sometimes avoid the request altogether, or are able to negotiate it away — bargaining power on this point tends to track the landlord’s perceived risk.

As explained in our overview of commercial lease agreements in Ontario, a guarantee is one of the most consequential terms a small business owner can sign, precisely because it reaches past the corporate structure that the business was set up to provide.

A personal guarantee is a separate contractual promise, typically signed alongside the lease itself, in which an individual — usually a business owner, director, or principal — agrees to personally cover the tenant’s obligations if the corporate tenant fails to meet them. It isn’t a formality or a box-checking exercise: it’s a real, independent obligation that can be enforced against the guarantor’s personal assets, including income, savings, and in some circumstances a home, depending on how collection proceeds.

Importantly, a landlord generally doesn’t need to exhaust every avenue against the corporate tenant before turning to the guarantor, unless the guarantee itself says otherwise. In practice, this means a default by the corporation can translate very quickly into a demand on the individual who signed the guarantee, which is why its scope deserves as much attention as the rent and term provisions of the lease itself.

An unlimited guarantee makes the guarantor responsible for the tenant’s obligations for the entire remainder of the lease term, with no dollar ceiling. If a business defaults in year two of a ten-year lease, an unlimited guarantee can expose the guarantor to rent and other obligations for the full eight years remaining, along with costs the landlord incurs in re-leasing the space.

A limited guarantee narrows that exposure in one of a few common ways: a fixed dollar cap (for example, an amount equal to twelve months’ rent), a time limit (for example, liability ends after the first two years of the term regardless of what happens afterward), or a scope limit that excludes certain obligations, such as the cost of structural repairs or environmental remediation. Some guarantees also step down gradually — covering a larger share of the obligation in the early years and progressively less as the tenant establishes a payment history.

Where more than one owner is involved, landlords often ask each one to sign as a joint and several guarantor. That phrase matters: it means the landlord can pursue any single guarantor for the entire amount owing, not just that person’s proportional share, leaving the guarantors to work out contribution among themselves afterward.

A landlord’s first draft of a guarantee is rarely the final word. It’s common, and generally reasonable, for a prospective tenant to ask for the guarantee to be capped at a specific dollar amount or number of months’ rent, rather than left open-ended for the full term. Landlords with a motivated interest in filling the space, or dealing with a tenant that has at least some operating history, will often agree to some form of limit.

A sunset clause is one of the more commonly requested compromises. It releases the guarantor from further personal liability once the tenant has maintained a defined track record — for instance, no late payments or defaults over the first two or three years of the term. The logic is straightforward: once the business has demonstrated it can reliably meet its obligations, the landlord’s original reason for wanting the guarantee has largely been addressed.

Other negotiating points include excluding guarantee liability for costs outside the tenant’s control, requiring the landlord to give the guarantor notice of a default before liability crystallizes, and clarifying — in writing — what happens to the guarantee if the lease is later assigned, renewed, or amended. Our guide to assigning or subletting a commercial lease looks more closely at how a guarantee can carry forward, or not, when a new tenant takes over.

If the corporate tenant defaults — commonly by failing to pay rent — the landlord will typically pursue its remedies against the tenant under the lease first, which may include terminating the lease, re-entering the space, and pursuing damages for lost rent. Where a personal guarantee exists, the landlord can also make a direct demand on the guarantor for amounts owing, often without needing to wait for the outcome of any process against the corporate tenant.

The amount a guarantor ultimately owes depends on the guarantee’s wording and any cap that was negotiated. An unlimited guarantee can expose the guarantor to the landlord’s full damages for the remainder of the term, reduced by whatever the landlord recovers through re-leasing the space, while a limited or capped guarantee restricts that exposure to the agreed ceiling. Our guide on commercial lease disputes covers how these kinds of default scenarios typically play out more broadly.

One of the reasons a personal guarantee is worth taking seriously is that it directly undercuts the liability protection that incorporating a business is meant to provide. A sole proprietor already has unlimited personal exposure to business debts, so a guarantee changes relatively little for them. For an owner who incorporated specifically to separate personal and business risk, however, signing a personal guarantee reopens exactly the exposure that incorporation was meant to close off — at least with respect to the lease.

This doesn’t mean a guarantee should automatically be refused; for many small and new businesses, it may simply be a condition of getting the space at all. It does mean the decision deserves the same scrutiny as the rest of the lease, ideally with an understanding of the worst-case exposure if the business doesn’t succeed. Reviewing both the lease and any attached guarantee before signing, and using our tools or reaching out through our contact page for general guidance on where to look for professional review, are reasonable steps before committing to either document.