CREJ - Property Management Quarterly - January 2017
Usually attached to a lease is an Exhibit “E” titled “Guaranty.” How many of us have taken the time to really delve into the “whereas” and “now, therefores” to understand what guarantors are really getting themselves into? First things first – I turned to my trusty dictionary! Guarantor is a person, organization, thing or entity that agrees to be responsible for another’s debt or performance under a contract, if the other fails to pay or perform. Still not feeling at ease with the term, I looked up “guarantor” synonyms – backer, sponsor, patron and surety. I then looked up words that rhyme with guarantor – at death’s door; canker sore, carnivore, either-or; go in for; in line for, more and more; nevermore, not long for, predator; promisor, saddle sore, stand up for; stick up for; to die for; tug-of-war, warrantor. Ouch! Ouch! I could not catch my breath. After reading three different lease guaranties, ranging from one paragraph to five pages, I called Amanda Halstead, seeking relief from legal jargon and asked for clarification. Sessions: Why get a guaranty? Halstead: A personal guaranty should be considered anytime a landlord is unsure of a tenant’s creditworthiness. It gives the landlord a second pocket to look in should the tenant default. Sessions: Who should be named as a guarantor? Halstead: If a tenant is an entity, a landlord should consider naming any principals of the entity and his/her spouses. Over the years, I have seen many leases that were guaranteed by individuals who intentionally put the bulk of their assets in their spouse’s names in an effort to protect their assets. It naturally follows that if the tenant is an individual, the tenant’s spouse should be named as a guarantor. Sessions: Are there any provisions that a landlord should be sure to include in the guaranty? Halstead: It’s important that a guaranty be one of payment and performance. In other words, we want the guarantor to be both liable for the payment of monetary obligations and for the performance of any covenants contained in the lease. If there is more than one guarantor, it should be noted that their obligations are joint and several, meaning that they are both 100 percent responsible for the obligations there under, and that any release of one guarantor shall have no effect on the liability of the other. A guaranty also should include a jury waiver. Attorney’s fees become a central issue in litigation and a jury trial can cost up to three times as much as a trial to the court. Landlords usually are careful to include jury waiver provisions in their lease but if that same language is not included in the personal guaranty, a guarantor can request a jury trial, adding to the time and expense of litigation. Sessions: Are the provisions of a guaranty normally negotiated? In other words, is the scope of the landlord’s guaranty often diminished during a lease negotiation? Halstead: It’s becoming increasingly more common for landlords to agree to limit a guarantor’s exposure under a guaranty. By way of example, I see guaranties that are limited to the initial term of the lease, guaranties that are limited to a particular dollar amount and, more frequently as of late, guaranties that are limited to a 12-month rolling period. Some guaranties may even be limited to a particular item, like reimbursement of a tenant improvement allowance. These limitations can be structured in any number of ways. Where we ultimately land depends in large part on the financial strength of the tenant and a landlord’s risk tolerance. Sessions: Is the landlord required to get the guarantor’s consent whenever there is a change in the lease terms? Halstead: I have to answer that with the typical attorney response – it depends. Often the guaranty will include language indicating that the guarantor obligations will apply to the lease as the same may be modified, amended or extended and that the guarantor’s consent is not required. This language typically is enforceable. That said, there is case law, which would suggest that material and unforeseen changes to the lease terms might serve to excuse a guarantor who has not consented. By way of example, an amendment whereby the square footage of the premises is doubled or tripled could be problematic for a landlord. It’s good practice to have a guarantor ratify and confirm his guaranty in connection with any amendments or modifications to the lease. Sessions: What actions by the landlord would relieve the guarantor from liability? Halstead: Any release of the tenant, fraud in the inducement or any other defense that might render a lease unenforceable, or any other act that might limit the tenant’s liability under the lease. Sessions: Will a lease assignment or subletting affect the guarantor’s obligation? Halstead: It can unless the landlord has included language in the guaranty indicating that the guaranty shall remain in full force and effect notwithstanding any assignment, sublease or change in ownership. Sessions: When a tenant defaults, how often have you pursued a guarantor? Halstead: Any time I sue a tenant, I name the guarantor in the lawsuit. Often, particularly in the instance of a tenant who is a single-purpose entity, the guarantor may be a landlord’s only means of collecting those amounts due to it. The importance of a personal guaranty and the language that should be included within it should not be underestimated. It can truly be a useful tool in the event of a tenant default.