Commercial Lease Guaranty Agreement
What is a commercial lease guaranty agreement? Banks require guarantees in case businesses default on loans.4 min read
2. Is a Lease Guaranty Enforceable?
3. What to Negotiate About a Lease Guaranty
What is a commercial lease guaranty agreement? Banks require guarantees in case businesses default on loans. Personal guarantees require individuals to repay loans personally in case of default. Personal guarantees are now standard.
Commercial leases are commitments; leasing companies want assurances that leases are covered. Premise upgrades cost landlords if the changes discourage new tenants; personal guarantees allow landlords to get some of this cost back. A personal guarantee is unsecured. Personal property is at risk by signing this agreement.
Negotiating a Personal Guarantee on a Commercial Loan
Landlords may negotiate and consider these options:
- Limit the guarantee amount. Landlords demanding rent recovery of the total lease period, plus costs for tenant improvements can be negotiated with. For example, CAM costs could be removed.
- Ask for a time limit on guarantees. Established a track record by offering a guarantee running for three years of a five-year lease.
- Substitute a letter of credit for a set dollar amount; the letter can be tapped if the property's abandoned.
- Pay rent after an early termination.
Courts will award how many months landlords need to re-let the space. Guaranteeing 6 or 12 months cuts through legal negotiations. Understand the laws. Leases are subject to state laws. Check the lease jurisdiction's laws relating to personal guarantees.
A combination of limiting the time and lease amount can be negotiated too. Creative lawyers can help. Minimize financial exposure by knowing a guarantee's details and negotiating before signing a personal guarantee.
Is a Lease Guaranty Enforceable?
Personal lease guaranties are integral to commercial leases. Lease guaranties are contracts where a guarantor agrees to meet the tenant's obligations. Landlords need tenants to meet the lease obligations. Nothing may be collected if tenants are destructive or bankrupt. Bad credit can result in requiring a guaranty from reliable guarantors. Guarantors may be responsible for tenant damages. Guarantors are principal individual owners or corporate affiliates of Tenant entities. Typically, relatives are Guarantors for individual tenants.
Enforceable lease guarantees establish clear obligations. How landlords collect from guarantors, and whether there're monetary limitations to the guaranty should be explicit. Ambiguities are construed in the guarantor's favor.
Guaranties should state that the landlord's entering into the lease in reliance on the guaranty. Both landlord and guarantor must sign the guaranty.
Landlords overlook lease amendments. Some states void lease guaranties modified without the guarantor's consent. New Jersey courts limit or discharge lease guaranties if the modifications injure the guarantor or increase liability. New Jersey hasn't stated what lease modifications increase the guarantor's risk. New Jersey landlords can ensure lease guaranty enforceability.
Landlords should state the guarantor's obligations and explicitly waive guarantors' rights to consent to modifications. Landlords may require guarantors record consent whenever modifications occur. To ensure a guaranty's enforceability, landlords must use explicit forms.
Landlords must consider how amendments affect the lease guaranty enforceability so that it remains effective.
What to Negotiate About a Lease Guaranty
A lease guaranty is one of payment, not of collection, and is to be unconditional. If tenants don't pay, guarantors are liable. When agreeing to a lease guaranty, a guarantor accepts risk. A guarantor's only liable for what a tenant's liable for; however, a guarantor remains liable even if the tenant's relieved of the obligation. The guarantor's still responsible for a lease defective in its execution.
Landlords request guarantors to waive defenses based on the tenant's insolvency, or some “surety” defenses. Guarantors are asked to waive notice of tenant defaults. It's assumed the guarantors and tenants are communicating. This assumption's made even for tenants and guarantors unrelated.
Guarantors could miss updates. Requiring the assignee to notify the original tenant or the guarantor is ridiculous because when the landlord's coming after the guarantor, it means that the assignee can't pay the obligation. The guarantor can't recover damages.
Guarantors should require copies of default notices and not be held liable for amendments made between landlords and unaffiliated tenants.
Landlords could require that guarantors give notice when the tenants are no longer “affiliated.” Landlords ask guarantors to “waive all defenses;" guarantors shouldn't be allowed to claim bankruptcy because tenants can. Guarantors shouldn't pay anything beyond a tenant's responsibility and be allowed to apply a tenant's defenses.
Landlords request guarantors to waive “offsets.” Since the guarantor shouldn't be liable for what the tenant wouldn't have to pay offsets should be available to the guarantor. Guarantors are asked to waive "subrogation" due to concern over a doctrine called Deprizio. This doctrine made landlords return guarantors' payments when guarantors could collect from tenants. Congress changed the law, but guarantors should waive subrogation rights.
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