Personal Indemnity required for a Commercial Lease
Contact Neufeld Legal for commercial leasing legal matters at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com
When leasing commercial real estate market, landlords frequently require a personal indemnity from a tenant’s principal to mitigate the risks associated with covenant strength. Because many small to mid-sized businesses operate as corporations, the corporation itself may have few liquid assets beyond its inventory or equipment. If a corporate tenant defaults on its rent or abandons the property, the landlord may find themselves with a judgment against a shell company that has no funds to pay. By securing a personal indemnity, the landlord effectively circumvents this corporate structuring, ensuring that the individual business owner is personally responsible for the financial obligations of the commercial lease.
A primary legal motivation for choosing a personal indemnity over a standard personal guarantee is the distinction between primary and secondary obligations under Canadian law. A guarantee is a secondary obligation, meaning the landlord must typically exhaust all legal remedies against the tenant (often a long and expensive court process), before they can pursue the guarantor. In contrast, an indemnity is a primary obligation that allows the landlord to seek payment directly from the individual indemnifier as soon as a breach occurs. This direct-to-indemnifier pathway provides the landlord with much faster access to capital to cover arrears or repair costs without the hurdle of prior litigation against the tenant.
Furthermore, personal indemnities provide essential protection during tenant insolvency or bankruptcy, which are governed by federal statutes like the Bankruptcy and Insolvency Act. When a tenant declares bankruptcy, a court-appointed trustee has the power to disclaim or cancel the lease, which can sometimes extinguish a guarantor’s liability because the underlying debt no longer exists. However, a well-drafted indemnity agreement is independent of the lease's status; it remains enforceable even if the lease is disclaimed or found to be void. This ensures that the landlord is not left empty-handed when a tenant’s business fails, as the indemnifier’s personal assets remain on the hook for the remainder of the term.
Landlords also use personal indemnities to manage the long-term risks associated with non-financial covenants, such as environmental remediation and property damage. Commercial leases often involve high-stakes responsibilities, including the handling of hazardous materials or the maintenance of complex HVAC systems. If a tenant causes environmental contamination and then dissolves their corporation to avoid the massive cleanup costs, the landlord would be left with a devalued property and a significant bill. A personal indemnity ensures that the individual owner remains legally bound to cover these tail risks, providing the landlord with a layer of security that survives the termination of the business entity.
Finally, the requirement of a personal indemnity serves as a powerful psychological and good faith mechanism in the landlord-tenant relationship. When a business owner pledges their personal home, savings, and credit score as security for a commercial lease, they are significantly more incentivized to maintain the business and fulfill lease obligations. This commitment reduces the likelihood of strategic defaults, where a tenant might otherwise walk away from a struggling location simply because the corporate entity has no assets to lose. For the landlord, this agreement acts as a vetting tool, confirming that the tenant is confident in their business model and possesses the personal financial stability to stand behind their commercial commitments.
For knowledgeable and experienced legal representation in negotiating, reviewing and drafting lease agreements, and protecting your business’ legal rights thereunder, contact lease lawyer Christopher Neufeld at 403-400-4092 [Alberta], 905-616-8864 [Ontario] or Chris@NeufeldLegal.com.
