What Kind of Guaranty Do You Really Have?

In today’s turbulent economic times, many landlords require a guaranty of the lease. The key question is: What kind of guaranty do you have and is it enforceable? A guaranty is a contract, and the law requires that there be consideration for a contract to be valid. Generally, in most jurisdictions, the execution of the lease simultaneously with the guaranty is sufficient consideration. Nevertheless, a subsequent requirement of a lease guaranty may give the guarantor the right to challenge the guaranty as unenforceable for lack of consideration. Some jurisdictions also allow continuing guaranties to be revoked. Therefore, the guaranty should provide that it is irrevocable and that the guarantor waives any right to revoke the guaranty.

Guaranties may also be guaranties for payment or guaranties of collection. The two are dramatically different, and the language of the document is key in the establishment of which type it is. A payment guaranty is a primary obligation of the guarantor, and the landlord may directly seek enforcement of the guaranty without ever having pursued the tenant. A landlord wants to make sure that any lease guaranty is drafted so as to make it a payment guaranty.

A collection guaranty is a secondary obligation which limits the landlord dramatically. Under this scenario, the landlord must first pursue the tenant; obtain a judgment against the tenant; seek collection and satisfaction of the judgment from the tenant; and, if after all these have occurred and the landlord has not been made whole, then it can pursue the guarantor.

If the guaranty is to be limited as to scope, amount or duration, the terms of the limitations should be clearly spelled out and drafted in such a way so as to avoid any confusion. Errors in drafting limitations often result in litigation challenging the enforceability of the guaranty.

The other real estate attorneys at our firm and I are very experienced in negotiating and drafting guaranty agreements. We write regularly in this blog about important business and legal issues such as this for the commercial real estate industry in Florida, and we encourage industry followers to submit their email address in the subscription box at the top right of the blog in order to automatically receive all of our future articles.