GUARANTY AGREEMENTS - Understanding Commercial Leases - Part 12

This is part 12 of a multi-part series on Understanding Commercial Leases

GUARANTY AGREEMENTS

PURPOSE - Landlord gets 1 or more third parties to accept responsibility for Tenant’s obligations under the lease in the event Tenant fails to pay.

TYPICAL TYPES

• Guaranty agreements may be restricted to only financial obligations, or may cover all obligations of Tenant.
• Individual owners of a business sign guaranty agreements for their business.
• Businesses sign guaranty agreements for their subsidiary businesses.

TIPS AND TRAPS

• Guaranty Agreement is not typically needed if the lease is in the name of individuals, as they are already individually responsible under the lease.
• If there is a parent or affiliated company, Landlord should try to get a guaranty from parent or affiliated company (especially if they have deeper pockets).
• Make sure Guarantors sign off on any lease modification agreements as failure to have them sign MAY potentially relieve them of responsibility.
• Get social security number of guarantors and tenants, as it will be useful for asset searches if you have to sue them later.

LANDLORD'S INTEREST

• Get as many parties to sign a guaranty as possible.
• Put language in the guaranty that says guarantor is still responsible, even if Landlord later modifies lease.
• Do not limit the duration of the guaranty and make it apply to option periods, etc.

TENANT'S INTEREST

• Do not provide a guaranty if possible.
• If any guaranty agreements are signed, make them for a limited period of time as a Tenant who has not defaulted during that time period has demonstrated their creditworthiness and reliability, thus reducing the need for any guaranty.
• Try to put as many "conditions" as possible on the guaranty, thus reducing the potential future liability of the guarantors.