ABC’s of Lease Guarantees

Jul 31

You are a commercial landlord and have found a tenant willing to rent your commercial space on your terms, but the tenant is a new business without an established credit history. You are a commercial tenant having trouble renting a space due to a prior breach of lease and are looking for a way to allay concerns of a prospective landlord about the viability of your business and a potential future breach. Circumstances such as these call for the use of a lease guaranty.

A lease guaranty is an agreement between the landlord and a third party whereby the third party agrees to take responsibility for the tenant’s defaults under the lease. Essentially, the guarantor of a lease is a financial safety net for a landlord that allows the landlord to pursue the tenant and the guarantor for a breach of the lease. This typically involves the paying of rent but also includes performance of other terms of the lease. A guarantor can be a corporation, bank, or individual. Typically, the guarantor will have a strong credit history and financial stability.

While there is no “magic language” used in creating a lease guaranty, the terms of a guaranty typically include a promise to perform and be liable for the obligations and liabilities of a lessee under a lease. From there, guarantees may include a liability cap, an agreement that the landlord may pursue the guarantor first before pursuing the tenant, and a time limit on how long the guarantee will remain in effect among other terms.

Guarantees can also come in several different forms depending on the landlord’s and tenant’s respective financial conditions and bargaining power. A full or absolute guaranty is typically favored by the landlord as, like it sounds, it requires the guarantor to cover all of the tenant’s obligations under the lease which includes not just rent but other non-monetary covenants. A limited guaranty is typically favored by the tenant since, again like it sounds, it covers partial obligations under the lease – typically just payment of rent. These often contain an expiration date; e.g., the guaranty expires 5 years into a 10 year lease. There are also “bad acts” guarantees, which spring up only after the occurrence of a specified event, which may include fraud, waste, or bankruptcy. Finally, there are “good guy” guarantees, where the guarantor’s liability is terminated if a tenant surrenders the premises.

Given the legal ramifications of a guaranty, it is important that both the landlord and tenant carefully read the guaranty and consult with counsel to understand the implications of the guaranty.

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Andrew Hall

Attorney Andrew Hall has over 10 years of experience handling complex real estate, business, and litigation matters throughout California and Washington. Andrew has vast experience with a wide range of clients – from residential to commercial property owners, landlords to tenants, real estate agents to brokers, title to escrow companies, hard money lenders to banking institutions. Andrew has handled cases ranging from administrative disputes, to unlawful detainers, to bankruptcies, to litigation, leaving his clients with the confidence that he can handle all of their needs from soup to nuts.

Andrew is committed to exploring efficient and cost-effective resolutions for his clients, whether that be through informal conversations with parties or attorneys, mediations, or settlement conferences. However, when litigation is inevitable, Andrew has counseled his clients through all stages of a dispute, including arbitrations, court trials, jury trials, and appeals at both the State and Federal Court levels.

Andrew resides in Carlsbad with his wife Lauren, son Nolan (7), and daughter Madeline (5). Andrew is actively involved with the Magdalena Ecke Family YMCA, where he can often be found on the weekends cheering Madeline on in any variety of youth sports or with Nolan participating in the Y’s Adventure Guides Program. Andrew enjoys playing golf, tennis, softball and good barbeque.

Andrew is committed to identifying his client’s goals and employing his big firm experience with small firm attention to help his clients achieve those goals.