Personal Guarantees in NZ Commercial Leases: What Directors Need to Know Before Signing | NZ Legal

When directors sign a commercial lease in New Zealand, the landlord will almost always ask for a personal guarantee. It is a routine request, rarely flagged as significant by either party, and most directors sign without negotiating the terms. That single signature, however, can convert a clean limited-liability arrangement into a personal financial exposure that follows the director long after the business itself has moved on or wound down.

This article looks at what personal guarantees actually do in a New Zealand commercial lease, why landlords insist on them, what is typically on the hook, and the levers tenants and their advisers can use to limit exposure before signing.

What a Personal Guarantee Actually Is

A personal guarantee in a commercial lease is a contract under which the directors (or other guarantors) personally promise to pay the landlord if the tenant company fails to meet its lease obligations. If the company defaults on rent, fails to pay outgoings, breaches its repair obligations, or walks away from the premises before the term ends, the landlord can pursue the guarantor directly for the shortfall.

The Auckland District Law Society ( ADLS ADLS Lease The standard commercial property lease form published by the Auckland District Law Society. The default starting point for almost every commercial lease in New Zealand. View glossary entry → ) Deed of Lease, which is the standard commercial lease form used across the country, sets out a guarantee in its Sixth Schedule. Sign that schedule and you are bound jointly with any co-guarantors, often “as principal debtor” rather than as a secondary surety. In practical terms, that means the landlord does not need to chase the company first. They can come straight at the directors.

Why Landlords Ask For Them

From a landlord’s perspective, the personal guarantee is the answer to a real commercial problem. Most New Zealand SME tenants are limited liability companies with modest balance sheets. If the business fails, the landlord may be left with months of unpaid rent, outgoings, dilapidations, and an empty premises that needs to be re-let.

A personal guarantee shifts that risk back onto the directors. It also concentrates the directors’ attention. A director who is personally exposed is more likely to keep paying rent through a rough patch, more likely to assign the lease properly, and less likely to abandon the premises mid-term. For these reasons, the request is rarely negotiable in principle. What is negotiable is the scope.

What You Are Actually On the Hook For

A standard ADLS personal guarantee covers far more than rent. Read carefully and you will typically find liability for:

• Base rent for the entire remaining term of the lease, including any rent reviews;
• Operating expenses and outgoings (rates, insurance, body corporate levies, building maintenance contributions);
• Reinstatement and make-good costs at lease end;
• Damages flowing from any breach of the lease;
• The landlord’s legal and recovery costs;
• GST on all of the above.

If there are multiple guarantors, the liability is usually joint and several. That means the landlord can pursue any one director for the full amount, regardless of whose decisions caused the default. A director with a family home and KiwiSaver balance is a far more attractive target than a co-guarantor with no assets.

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A director with a family home and KiwiSaver balance is a far more attractive target than a co-guarantor with no assets.

Joint and several vs several only

Joint and several	Several only
Liability per guarantor	Full amount of the debt	Their proportionate share only
Landlord's choice of target	Any one guarantor, regardless of fault	Each guarantor pursued separately
Risk to a guarantor with assets	Disproportionate. Often picks up the full bill	Limited to their share
Default ADLS position	Yes, this is the default	Negotiated amendment

The Levers You Can Pull Before Signing

The default ADLS guarantee is heavily weighted toward landlords, but most landlords will accept reasonable amendments if they are raised properly during negotiation. The most useful levers are:

Cap the amount. The strongest protection is a dollar cap on total guarantor liability. A cap equal to six or twelve months of rent and outgoings is a common landing spot for SME deals. Without a cap, the exposure can be the rent for a six-year term plus reinstatement, which can run into hundreds of thousands of dollars.

Cap the duration. Limit the guarantee to the initial term only, so that if the tenant company exercises a renewal, the directors are not automatically extended along with it. This is particularly important where the directors plan to sell the business or step back during the lease.

Several not joint. Where there are multiple guarantors, ask for several liability rather than joint and several. Each director then carries their own share and cannot be pursued for the full amount on their own.

Release on assignment. When the tenant assigns the lease to a creditworthy incoming tenant, the original guarantors should be released. The default ADLS position keeps the original guarantors on the hook even after assignment, which is a long-tail risk that can outlast the directors’ involvement in the business.

Require landlord mitigation. Add a clause requiring the landlord to take reasonable steps to re-let the premises before pursuing the guarantor. This prevents the landlord from sitting on an empty building, doing nothing, and presenting the directors with a bill for the full remaining term.

Carve out reinstatement. Reinstatement and make-good costs are highly variable and often the largest single item in a lease-end claim. Where possible, exclude these from the guarantee or cap them separately.

Personal guarantee negotiation checklist

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1. Cap total guarantor liability at a dollar figure (typically six to twelve months of rent and outgoings).
2. Limit the guarantee to the initial term, so renewals do not extend exposure automatically.
3. Convert joint and several liability to several only where there are multiple guarantors.
4. Require release of the original guarantors on assignment to a creditworthy incoming tenant.
5. Insert a landlord mitigation obligation. The landlord must take reasonable steps to re-let before pursuing guarantors.
6. Carve out, or separately cap, reinstatement and make-good costs.

Reset

What Happens When You Sell or Step Back

A common surprise for retiring directors is that selling the company does not, by itself, release them from a personal guarantee. The guarantee is between the director and the landlord, and the landlord is under no obligation to release it just because the shareholding has changed.

If you are planning to sell or exit, build the release into the sale agreement and the lease assignment. Ask the landlord, in writing, to substitute the incoming directors as new guarantors. Without that release, you can be holding personal liability for a business you no longer own and decisions you no longer control.

The Real Stakes

The cleanest way to think about a personal guarantee is to assume the worst case: the company fails, the premises sit empty, and the landlord pursues the guarantors for everything they can. Could you write that cheque? Would your house, your savings, and your retirement plans absorb it? If not, the guarantee needs to be capped or otherwise limited before you sign, not after the business is in trouble.

For most SME directors, the question is not whether to give a personal guarantee. It is how to keep the liability inside a known, survivable boundary. Done well, that work happens at the lease negotiation stage and takes a few hours of legal time. Done poorly, it surfaces years later as an unwelcome demand letter.

Sources

1. ADLS Deed of Lease, 6th EditionSixth Schedule sets out the standard guarantor covenants used across most NZ commercial leases.
2. Property Law Act 2007Sections governing landlord remedies and guarantor liability on assignment.
3. Companies Act 1993Limited liability framework that a personal guarantee contractually overrides.

Get Advice Before You Sign

A personal guarantee is a contract with serious long-term consequences, and the time to negotiate it is before you sign the lease, not after. NZ Legal works with directors and business owners across New Zealand on commercial lease negotiations, including reviewing and amending personal guarantee clauses to keep exposure within sensible limits. If you are about to sign a commercial lease, talk to one of our leasing lawyers before that guarantee schedule is signed.