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A
guaranty, or guarantee (the two spellings are interchangeable),
is defined generally as a pledge to pay the debt, or to perform
the duty, of another - referred to as the "obligee" - in event
of the obligee's default or inadequate performance. A guaranty
that involves the repayment of money and the assurance of
performance is called, for obvious reasons, a guaranty of
payment and performance. It is a very broad legal obligation
that typically is designed to put the guarantor in a position
of primary liability, meaning that the beneficiary of the
guaranty may proceed directly against the guarantor without
first attempting to enforce the underlying obligation against
the obligee. This is the form of guaranty preferred by landlords
(as well as creditors in general) and the one most often requested
together with the comment, "It's not negotiable!"
Another
type of guaranty, which is normally found only in transactions
securing the repayment of money, is called a guaranty of collection,
which is designed to provide the guarantor with secondary
liability, meaning that the beneficiary of the guaranty must
first attempt to compel performance by the obligee, and only
after an inability to do so will the guarantor become obliged
to pay. Given the need first to proceed against the obligee,
the guarantor under a guaranty of collection has a level of
protection not afforded to a guarantor of payment and performance.
Therefore, this form of guaranty is rarely, if ever, offered
in lease transactions, inasmuch as landlords want to know
that, in the event of a default, payment may be secured quickly
and cost effectively.
In
either one of the two situations described above, a guaranty
may be unlimited or limited, as well as unconditional or conditional.
Clearly, an unlimited, unconditional, guaranty offers the
most protection to a party seeking security, and the least
to the guarantor. A limited guaranty does just what the name
implies - it contains some limitation on personal exposure,
the most obvious example being where the guarantor's personal
liability is limited to a specific dollar amount. Similarly,
a conditional guaranty provides that a guarantor will be held
personally liable only if certain conditions are first met.
For example, a guarantor may request, as a condition to any
liability under the guaranty, that written notice be given
that a default has occurred in the underlying obligation.
This relatively minor condition allows the guarantor to know
that the obligee has failed to perform and to take appropriate
steps in an effort to compel performance.
A
"Good Guy" guaranty is usually cast in the form of an unconditional
guaranty of payment and performance by one or more of the
obligee's principals, but in reality it contains a special
set of limitations or conditions that, if satisfied, releases
the guarantor from personal liability. The underlying rationale
for such a guaranty is the desire that most landlords have
to ensure that, in the event the lease is terminated early
due to a default in rent payments, the premises will be left
in the same condition in which they would have been left had
the lease simply expired (i.e., vacant and broom clean, with
all monies paid up to the date on which the tenant moved out).
As a result, the guarantor may promise to be a "good guy"
and agree to be personally responsible for the tenant's performance,
but only up to the time that the tenant leaves the premises,
even if that occurs prior to the lease expiration date.
The
guarantor's making such a promise, and keeping it, enables
the landlord to re-gain possession of the premises so that
they may be shown, and a new tenant found, more easily. At
the same time, the security deposit on hand may be utilized
to cover some or all of the defaulted rent. Of course, the
tenant will remain liable for any future damages caused by
its default, even though the "Good Guy" principal is released
from personal liability. For those states, such as Connecticut
and New Jersey, that follow the majority rule obligating a
commercial landlord to mitigate damages arising from a defaulted
lease, the "Good Guy" guaranty works in the defaulting tenant's
favor by placing the landlord in a position of having to find
a new tenant relatively quickly. Even in New York, however,
which follows the minority view that commercial landlords
need not mitigate their damages, the "Good Guy" guaranty still
serves the valuable purpose of releasing the principal from
personal liability for the remainder of the defaulting tenant's
lease obligations.
There
are many ways to structure personal guarantees, as a result
of which opportunities to negotiate limitations and conditions
in those guarantees frequently present themselves. Obviously,
not every negotiation can be successful, but the mere effort
to negotiate, particularly at the early, "business point"
stage of a transaction, often uncovers important issues and
reveals useful information to both the parties and their attorneys.
In any event, any time a commercial tenant is asked to furnish
a personal guaranty by its principal, an opportunity arises
to dress that guaranty with "Good Guy" protections.
One
word of caution: when the limitations and protections of a
"Good Guy" guaranty get included in an initial deal memorandum,
as often occurs more as a matter of form than as part of any
calculated negotiating strategy, they can become easy targets
at which a savvy landlord's attorney can whittle away during
the lease drafting stage. Our advice? As a general rule, a
tenant should have the deal memorandum reviewed by counsel
prior to permitting the broker to deliver it to the other
side, inasmuch as it is an important document that, although
not legally binding, sets the stage for the drafting and negotiations
that follow.
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The
information provided above is intended to help the reader
understand the nature of some basic issues involved in certain
guaranty transactions in New York. Of course, states other
than New York may have their own relevant statutory and common-law
standards. Regardless of what state's law will be applied,
however, we suggest that, in the event a legal question arises
concerning the use, negotiation or drafting of guarantees,
advice from a knowledgeable attorney be obtained.
Check
back here periodically to find new information of interest,
as we update this page frequently.
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