assignment of personal guaranty agreement

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Be Careful When You Personally Guarantee a Contract

HNW May 3, 2021 Business Law , Contract Law

A contractual guarantee agreement means if a contract is breached and payment not made, the person who guaranteed the contract can be held personally liable for payment to the other side.  The rules governing the interpretation of a personal guarantee agreement have not changed much over the years.  These same rules govern question(s) relating to the interpretation of a contractual guaranty.

Don’t forget, if a contract and its express language contains a personal guarantee clause, you’re on the hook.

To discuss your NJ business contract, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at [email protected] .  Please ask us about our video conferencing consultations if you are unable to come to our office.

By Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a Freehold Township, Monmouth County, NJ Business Law Attorney

Guaranty Agreement

Choose the state where the guaranty is being provided. This can be the residence of all of the parties, or it can be just the residence of the guarantor.

State of Alabama

This Guaranty Agreement, hereinafter referred to as the "Guaranty" is made effective as of ________ by and between the following parties:

________ (the "Guarantor") having a primary address as follows:

________ (the "Debtor") having a primary address as follows:

________ (the "Creditor") having a primary address as follows:

The Guaranty is being made by the Guarantor to the Creditor for the benefit of the Debtor.

Article 1 - GUARANTY:

In consideration of the Creditor's extension of credit to the Debtor and the promises and covenants contained herein, as well as other good and valuable consideration (the receipt and sufficiency of which is hereby acknowledged), the Guarantor guarantees, in a limited capacity, the certain and prompt payment of all monies owing to the Creditor from the Debtor, whether such payments currently exist or will be incurred in the future (as this Guaranty is specifically agreed to be a continuing Guaranty between the parties, subject to the duration specification described elsewhere in this agreement), whether such debt is voluntary or involuntary and however such debt may arise, under the terms and conditions herein. The Guarantor further acknowledges that the Creditor will be relying on this Guaranty for the purposes of extending credit to the Debtor. This Guaranty is made for the benefit of Creditor.

Article 2 - LIMITATION:

The amount guaranteed by the Guarantor is limited to the following: $ ________ . Such amount shall be exclusive of any fees, costs, or expenses which the Creditor may incur to collect on the guaranteed amount.

Article 3 - DURATION:

This is a continuing Guaranty which may not be revoked by the Guarantor. The Guaranty shall continue until all obligations are paid back to the Creditor.

Article 4 - DEFAULT:

In the event of Debtor's default, Creditor shall be required to notify Guarantor before proceeding against Guarantor for the limited amount guaranteed.

Article 5 - ADDITIONAL CREDIT:

Creditor shall be required to notify Guarantor in the event that any additional extensions of credit are made to the Debtor. Guarantor's liability shall continue to be for the limited amount guaranteed, unless the Guarantor otherwise authorizes in a signed writing.

Article 6 - CREDITOR TERMS:

Creditor is obligated to pursue Debtor for any claim on the debt prior to proceeding against Guarantor. Creditor may not bring suit against Guarantor in the first instance. Guarantor waives any notice requirement of Creditor's acceptance of this Guaranty. Any of Debtor's debts to Guarantor will be subrogated to Debtor's debts to Creditor, such that even if Debtor pays Guarantor on any debt, such payment shall be considered held in trust for Creditor. Guarantor waives all claims or defenses which may be available to Guarantor regarding Debtor's debt. This Guaranty may be one of several guarantees regarding Debtor's liability to Creditor, but Creditor may modify or release any other guarantee with or without notice to Guarantor. Guarantor's liability shall not change.

Article 7 - ALTERATIONS AND MODIFICATIONS:

Creditor may change the terms of repayment at any time. Creditor is not under an obligation to inform Guarantor. Guarantor's obligations shall continue to be as listed explicitly herein.

Article 8 - GUARANTOR'S FINANCES & ASSETS:

Creditor may make reasonable requests of Guarantor's financial information and Guarantor is obligated to provide such information.Guarantor shall not transfer any of Guarantor's assets without prior written consent of the Creditor.

Article 9 - SECURITY:

This Guaranty is secured by the following:

ARTICLE 10 - GENERAL PROVISIONS:

A) GOVERNING LAW: This Agreement shall be governed in all respects by the laws of the state of Alabama and any applicable federal law. Both Parties consent to jurisdiction under the state and federal courts within the state of Alabama . The Parties agree that this choice of law, venue, and jurisdiction provision is not permissive, but rather mandatory in nature.

B) LANGUAGE: All communications made or notices given pursuant to this Agreement shall be in the English language.

C) ASSIGNMENT: This Agreement, or the rights granted hereunder, may not be assigned, sold, leased or otherwise transferred in whole or part by either Party without express written consent.

D) AMENDMENTS: This Agreement may only be amended in writing signed by both Parties.

E) NO WAIVER: None of the terms of this Agreement shall be deemed to have been waived by any act or acquiescence of either Party. Only an additional written agreement can constitute waiver of any of the terms of this Agreement between the Parties. No waiver of any term or provision of this Agreement shall constitute a waiver of any other term or provision or of the same provision on a future date. Failure of either Party to enforce any term of this Agreement shall not constitute waiver of such term or any other term.

________ ) 555588852558: 52 522 252888822 25 2252 22 2588 825222222 88 5285 22 82 5222225825882, 2522 2588 825222222 8888 82 522225 5222525 22 252 252222 228288552 22 522525 252 225258882 5222225825882 252888822, 525 252 5282 22 252 825222222, 85885 525 22225825882. 52 5 82552 52888228 22 52225 2588 825222222 58 25288525 525282, 252 8285885822 25 5222225825888822 22 522 252888822 22 2588 825222222 85588 222 522282 252 85885822 25 22225825888822 22 252 522582822 22528 525 2528888228, 85885 85588 82 22225825 58 82 252 222225822 2252 25 252888822 555 222 8222 82885525 82 2588 825222222.

F) ENTIRE AGREEMENT: This Agreement constitutes the entire agreement between the Parties and supersedes any prior or contemporaneous understandings, whether written or oral.

G) NOTICES: Any notices required under this Guaranty may be made electronically to the email address the parties may, from time to time, inform each other of.

H) HEADINGS: Headings to this Agreement are for convenience only and shall not be construed to limit or otherwise affect the terms of this Agreement.

Signature: _________________________

HOW TO CUSTOMIZE THE TEMPLATE

Answer the question, then click on "Next."

The document is written according to your responses - clauses are added or removed, paragraphs are customised, words are changed, etc.

At the end, you will immediately receive the document in Word and PDF formats. You can then open the Word document to modify it and reuse it however you wish.

LeaseAgreements.com

• Lease Agreement Templates (6) »
• Personal Guarantee

Personal Guarantee (Guaranty) for a Lease Agreement

A personal guarantee form , or “co-signing agreement”, is a document that makes the signer personally liable for the performance of a lease agreement, whether or not they are the tenant. A personal guarantee is common when singing on behalf of a residential tenant that doesn’t have the financial capability to be approved for a lease and for commercial leases. After signing, the personal guarantee should be attached to the lease with copies given to all parties.

The signer is known as the “guarantor.”

Versions (5)

• AdvantageTitle.com Version
• eForms.com Version
• Entrata.com Version
• PrintableLeaseAgreement.org Version
• WordTemplatesOnline.net Version

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Understanding an assignment and assumption agreement

Need to assign your rights and duties under a contract? Learn more about the basics of an assignment and assumption agreement.

Get your assignment of agreement

by   Belle Wong, J.D.

Belle Wong, is a freelance writer specializing in small business, personal finance, banking, and tech/SAAS. She ...

Read more...

Updated on: November 24, 2023 · 3 min read

The assignment and assumption agreement

The basics of assignment and assumption, filling in the assignment and assumption agreement.

While every business should try its best to meet its contractual obligations, changes in circumstance can happen that could necessitate transferring your rights and duties under a contract to another party who would be better able to meet those obligations.

If you find yourself in such a situation, and your contract provides for the possibility of assignment, an assignment and assumption agreement can be a good option for preserving your relationship with the party you initially contracted with, while at the same time enabling you to pass on your contractual rights and duties to a third party.

An assignment and assumption agreement is used after a contract is signed, in order to transfer one of the contracting party's rights and obligations to a third party who was not originally a party to the contract. The party making the assignment is called the assignor, while the third party accepting the assignment is known as the assignee.

In order for an assignment and assumption agreement to be valid, the following criteria need to be met:

• The initial contract must provide for the possibility of assignment by one of the initial contracting parties.
• The assignor must agree to assign their rights and duties under the contract to the assignee.
• The assignee must agree to accept, or "assume," those contractual rights and duties.
• The other party to the initial contract must consent to the transfer of rights and obligations to the assignee.

A standard assignment and assumption contract is often a good starting point if you need to enter into an assignment and assumption agreement. However, for more complex situations, such as an assignment and amendment agreement in which several of the initial contract terms will be modified, or where only some, but not all, rights and duties will be assigned, it's a good idea to retain the services of an attorney who can help you draft an agreement that will meet all your needs.

When you're ready to enter into an assignment and assumption agreement, it's a good idea to have a firm grasp of the basics of assignment:

• First, carefully read and understand the assignment and assumption provision in the initial contract. Contracts vary widely in their language on this topic, and each contract will have specific criteria that must be met in order for a valid assignment of rights to take place.
• All parties to the agreement should carefully review the document to make sure they each know what they're agreeing to, and to help ensure that all important terms and conditions have been addressed in the agreement.
• Until the agreement is signed by all the parties involved, the assignor will still be obligated for all responsibilities stated in the initial contract. If you are the assignor, you need to ensure that you continue with business as usual until the assignment and assumption agreement has been properly executed.

Unless you're dealing with a complex assignment situation, working with a template often is a good way to begin drafting an assignment and assumption agreement that will meet your needs. Generally speaking, your agreement should include the following information:

• Identification of the existing agreement, including details such as the date it was signed and the parties involved, and the parties' rights to assign under this initial agreement
• The effective date of the assignment and assumption agreement
• Identification of the party making the assignment (the assignor), and a statement of their desire to assign their rights under the initial contract
• Identification of the third party accepting the assignment (the assignee), and a statement of their acceptance of the assignment
• Identification of the other initial party to the contract, and a statement of their consent to the assignment and assumption agreement
• A section stating that the initial contract is continued; meaning, that, other than the change to the parties involved, all terms and conditions in the original contract stay the same

In addition to these sections that are specific to an assignment and assumption agreement, your contract should also include standard contract language, such as clauses about indemnification, future amendments, and governing law.

Sometimes circumstances change, and as a business owner you may find yourself needing to assign your rights and duties under a contract to another party. A properly drafted assignment and assumption agreement can help you make the transfer smoothly while, at the same time, preserving the cordiality of your initial business relationship under the original contract.

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Guaranty And Security Agreement

Jump to section, what is a guaranty and security agreement.

A guaranty and security agreement is a contract where one party agrees to pay a debt if the other fails to do so, and where the debt is secured by collateral. The guaranty portion of the agreement places a cosigner on a loan. This person, called a guarantor, can be held legally responsible for the debt if the lendee defaults on the loan. As a second line of defense, a lender might also require collateral, which is property or some other asset that can be seized and liquidated to generate money to pay for any outstanding loan balance.

The purpose of the guaranty and security agreement is to reduce the amount of risk that lenders take on.

Common Sections in Guaranty And Security Agreements

Below is a list of common sections included in Guaranty And Security Agreements. These sections are linked to the below sample agreement for you to explore.

Guaranty And Security Agreement Sample

Reference : Security Exchange Commission - Edgar Database, EX-10.2 3 d431998dex102.htm GUARANTY AND SECURITY AGREEMENT , Viewed September 16, 2022, View Source on SEC .

Who Helps With Guaranty And Security Agreements?

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ContractsCounsel is not a law firm, and this post should not be considered and does not contain legal advice. To ensure the information and advice in this post are correct, sufficient, and appropriate for your situation, please consult a licensed attorney. Also, using or accessing ContractsCounsel's site does not create an attorney-client relationship between you and ContractsCounsel.

Meet some of our Guaranty And Security Agreement Lawyers

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~ Charles Kramer - Technology, Contracts and Intellectual Property Attorney ~ www.linkedin.com/in/charleskramer I am a New York corporate and technology attorney. My experience includes: - representing high-tech companies (including software, military, manufacturing and computer game companies) in connection with negotiating and drafting (1) toolkit, enterprise, Saas, PaaS and other complex agreements and licenses with companies around the world; (2) joint-venture, sales, publishing and distribution agreements; and (3) general corporate agreements. - 5 years as General Counsel of a software company (and many more years representing it as outside counsel); - 3 years as an associate in the Wall Street law firm of Lord, Day & Lord (then the oldest law firm in New York City practicing under the same name); and - speaking at conferences on legal issues including at the annual Game Developers Conference and Miller Freeman's Digital Video Conference. I am comfortable working in areas where the technology -- and the related law -- are new. My recent work includes working as a contract attorney (extended on a month-by-month basis) as American counsel for a publicly traded Swiss industrial corporation with responsibility for drafting form contracts for its planned "industrial internet of things" digital services. Accordingly I am comfortable working in a corporate environment using modern collaboration tools. Charles Kramer (917) 512-2721 (voice, voicemail, text)

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• Sep 15, 2023

Understanding Personal Guarantees: Specificity and Enforceability

Introduction

A personal guarantee is a legal commitment where an individual agrees to be responsible for a company's debt or performance under a contract if the company fails to pay or perform. In the state of Florida, personal guarantees are often used in business transactions, particularly in situations where a small business is seeking a loan or entering into a lease agreement. Understanding how personal guarantees are created, enforced and interpreted by the judiciary – which is the ultimate goal – is necessary before signing one or having someone sign one that you may seek to enforce.

This article aims to provide an overview of personal guarantees in Florida, focusing on their specificity and enforceability.

What are Personal Guarantees?

A personal guarantee is a legal instrument that allows a lender, landlord, or other party to recover a debt from the personal assets of a guarantor if the principal debtor defaults on its obligations. In essence, it is a promise made by a third party (the guarantor) to pay a debt or fulfill a commitment if the primary obligor fails to do so. The promise is the guaranty whereas the agreement itself is referred to as the guarantee.

In Florida, personal guarantees are commonly used in business loans, commercial leases, and other business transactions. They provide an additional layer of security for the creditor, as they can pursue the guarantor's personal assets if the business fails to meet its obligations. The principal is the entity that is primarily responsible for repaying the debt. The guarantor is the individual that personally guarantees performance of the principal’s contractual obligations, which typically entails payment. The rights and responsibilities of the parties, as discussed further in this article, can vary greatly depending on the contractual language.

When to Seek a Personal Guarantee

Institutional lenders and large companies often request personal guarantees if they believe the company may be unable to meet its financial obligations. However, every business needs to assess and hedge risk. Part of this process includes determining when a personal guarantee may be necessary.

In the world of small business, there are several circumstances where the request for a personal guarantee might arise. This is particularly common when the business is seeking financial assistance or entering into contractual agreements. For instance, when a small business applies for a loan, especially if it's a startup or lacks a robust credit history, lenders often require a personal guarantee from the business owner. This provides the lender with an added layer of security, ensuring that the loan will be repaid even if the business encounters financial difficulties.

Similarly, when leasing commercial property, landlords may request a personal guarantee from the business owner. This acts as a safety net for the landlord, ensuring that the rent will be paid regardless of the business's financial status. Additionally, suppliers may require personal guarantees before extending credit for the purchase of goods or services.

In essence, a personal guarantee serves as an additional financial safeguard for the party extending credit or entering into a contract with the business. However, it's crucial for small business owners to understand that providing a personal guarantee means potentially putting personal assets at risk if the business cannot meet its obligations. Therefore, it's always advisable to seek legal counsel before signing any personal guarantee to fully comprehend the potential implications and risks.

Specificity of Personal Guarantees

Florida law requires personal guarantees to be in writing and signed by the guarantor. However, the law does not prescribe a specific form or language for personal guarantees. The terms of a personal guarantee can vary widely depending on the circumstances of the transaction and the negotiation between the parties.

Despite the lack of a prescribed form, it is crucial for a personal guarantee to be specific and clear. It should clearly identify the guarantor, the primary obligor, the creditor, and the obligations guaranteed. It should also specify the extent of the guarantor's liability, whether it is limited to a certain amount or unlimited, and whether it is a continuing guarantee or limited to a specific transaction.

Enforceability of Personal Guarantees

In Florida, personal guarantees are enforceable if they meet the basic requirements of contract law, including mutual assent, consideration, legality of object, and capacity to contract. If a personal guarantee is vague or ambiguous, a court may interpret it against the party who drafted it, usually the creditor.

If a business defaults on its obligations, the creditor can sue the guarantor to enforce the personal guarantee. The creditor must prove the existence of the personal guarantee, the default by the primary obligor, and the amount of the debt. If the creditor prevails, it can obtain a judgment against the guarantor and enforce it against the guarantor's personal assets. It is important to note that it is the obligation of the creditor to show that all conditions to the guarantor’s liability have occurred or been performed prior to filing of the lawsuit. This obligation includes showing that the value of the assets received as collateral was insufficient to cover the entire debt.

Conditional vs. Absolute Guaranty

The creditor has no obligation to seek repayment of the debt from the principal before pursuing the guarantor if the guarantee specifies that the guaranty is “absolute.” A conditional guarantee, on the other hand, requires the creditor has acted with due diligence to collect the debt from the principal but is unable to collect the amounts due. In fact, a court may conclude that the guarantor was discharged if the creditor unreasonably neglects to proceed against the principal. In the same vein as the conditional guaranty, the courts have also held that if a creditor is negligent in protecting, enforcing or securing collateral for the debt, such as real or personal property and accounts receivable, that the debt or guarantor may be discharged.

A breach of a guarantee giving rise to a cause of action typically occurs when the principal defaults followed by the subsequent refusal of the guarantor to pay the debt. It follows that the best practice even if the guarantee is absolute is to make formal written demand for payment from both the principal and guarantor.

Debt Exceeds the Guarantee

A guarantee is not void if the debt exceeds the personal guaranty. Even improper or excessive charges in derogation of the contract do not relieve the guarantor of the obligation under the guarantee. However, the guarantor under these circumstances can only be held liable to the extent of the guaranty.

Modifying Terms of the Contract

If the terms of the contract are changed in a material way, the creditor should obtain the assent of the guarantors to the new terms. Otherwise, the courts may deem the guarantee unenforceable. A guarantor’s refusal to execute a new guarantee does not constitute revocation of the guarantee in existence.

Attorney’s Fees and Costs

Unless the guarantee specifies that the guarantor is liable for attorney’s fees and costs, the creditor may be unable to collect these significant expenditures that it made in pursuit of the debt.

Personal guarantees play a vital role in Florida's business transactions, providing creditors with an additional layer of security. However, they also pose significant risks to guarantors, who may be personally liable for a business's debts. Therefore, it is crucial for guarantors to understand the terms of a personal guarantee before signing it and to seek legal advice if necessary. Contact the legal experts at VAdam Law with any questions regarding your company’s contracts, including personal guarantees.

If you would like to learn more about VAdam Law and schedule a free consultation, visit our online scheduling portal or call 24 hours a day at (954) 451-0792.

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Limited liability protections afforded by various corporate, limited liability, or limited partnership laws normally insulate business owners from personal liability for their business's debts.

However, lenders routinely require a small business owner to sign a personal guaranty as a condition for a commercial loan to the business entity, essentially circumventing the statutory protection against personal liability. 

What is a Guaranty?

A guaranty is a contractual agreement in which a person (or an entity) agrees to pay the debts of another. In order to be enforceable, the guaranty must be in writing and signed by the guarantor or some other party legally authorized by the guarantor.  The guarantor becomes obligated to repay the borrower's loan, regardless of whether the guarantor is directly involved in the loan transaction between the lender and the borrower.

Lenders require guaranty agreements as a way to ensure the business loan is repaid timely. In addition to having more assets from which to receive payment, lenders also believe that if a business owner puts the owner's own personal assets and income at risk, the owner will be much more likely to treat repayment of the business loan as a priority. 

Often times, the guaranty is simply a necessary risk that a business owner must take in order to obtain a business loan. If the borrowing business entity continues to make its loan payments under the terms of the loan, then typically, the guarantor need not worry about the lender enforcing the guaranty even though it usually would have the right to do so.  However, if the borrower fails to repay its debt, then the lender will be entitled to enforce the guaranty and seek repayment from the guarantor's personal assets and income.

A guarantor who does not read the terms in a lender's requested guaranty agreement or seek more suitable terms can become directly liable for the borrower's obligation. For example, if the lender tenders a guaranty agreement containing language that provides that the guarantor will be "directly and primarily liable" for the obligation, then the lender does not have to wait for the borrower to default before suing the guarantor for the debt.  In essence, this language converts the guarantor into a borrower.

How the lender may proceed, and to what extent the guarantor can be held liable can hinge on several common provisions which may be contained in the guaranty agreement. Any potential guarantor should read a proposed guaranty agreement carefully and understand each contractual provision.  Often the terms can be negotiated, even if a business entity is a startup and has limited assets and income.

What is a Continuing Guaranty?

While some guaranties may only subject the guarantor to liability for a single obligation, lenders will often propose a guaranty that will remain in effect for an indefinite time and guaranty all of the borrower's past, current, and future obligations to the lender, as well as any renewals or extensions to those debts.

For example, the proposed guaranty agreement may state that the indebtedness guaranteed includes:

all of the principal amount outstanding from time to time and at any one or more times, accrued unpaid interest thereon and all collection costs and legal expenses related thereto permitted by law, attorneys' fees arising from any and all debts, liabilities, and obligations of every nature or form,  now existing or hereafter arising or acquired  that borrower individually or collectively or interchangeably with others, owes or will owe lender. 

This language makes the guarantor liable for:

• The borrowing entity's unpaid debts to the lender which existed prior to the guaranty and perhaps prior to the time the guarantor obtained an interest in the entity;
• The loan which the borrowing entity is in the process of obtaining from the lender; and,
• Any and all future loans or debts the borrowing entity owes to the lender, including any debts that arise after the guarantor no longer has any interest in the borrowing entity.

While a guaranty of a specific obligation, in contrast, generally terminates once the obligation is satisfied, a continuing guaranty will remain in effect until the guarantor terminates the agreement by providing written notice to the lender. This means that even if all existing obligations have been satisfied, the guarantor will continue to be held liable for any future obligations the borrowing entity incurs from the lender if the guarantor has failed to provide proper notice of the intent to terminate the agreement before any subsequent loan is made or debt incurred.  This can prove especially problematic if an owner-guarantor pays off the business's loan that was made during the time the owner-guarantor had an interest in the business, then sells the business, but forgets that the continuing guaranty exists!

Typically, the guarantor must follow the specific instructions contained in a continuing guaranty agreement before a termination is effective. If the continuing guaranty agreement is properly terminated, the termination will only be effective on additional obligations of the borrower which it incurs  after  the termination date.  The guarantor will remain liable for the full outstanding balance of all existing debts, including all interest and fees, owed by the borrowing entity to the lender.  In order to be truly free of the effects of the continuing guaranty agreement, the guarantor and/or borrower must be prepared to satisfy those existing obligations in full. 

Unlimited and Limited Guaranties

An  unlimited  guaranty does not limit a guarantor's obligation to a particular time period or amount.  On the other hand, a  limited  guaranty will hold a guarantor liable only up to a specified amount of debt, up to a certain point in time, or only on certain specified loans. 

A common use of a limited guaranty involves a small business entity that has more than one owner. Negotiations with the lender may result in each owner-guarantor's liability being limited to a percentage of the borrower's obligations equal to, or greater than, each guarantor's percentage of ownership interest in the business, but not the full amount.  In some cases, however, a lender may insist that the total amount of guarantor liability exceed 100% so that the lender will have a cushion if one or more of the owner-guarantors have insufficient assets to ante up the owner's entire share.  Alternatively, a limitation can be as simple as a limitation of "no more than" a specific amount, which is less than the entire amount of the debt owed.  Obviously, the relative bargaining power of the borrower and the owner-guarantor(s) will determine the result of the negotiation, but it is more common than it should be that the owner-guarantor just signs what it is in the initial loan documents without asking for less burdensome terms.

Joint and Several Liability

It can be easier for a business to obtain a loan if multiple individuals are prepared to guaranty the debts of the business. For example, all four owners of a small startup business may agree to give unlimited guaranties to a lender.  However, that does not mean that each guarantor is only liable for their pro-rata share (in our example, 25%) of the overall debt.  Most guaranties contain "joint and several" liability provisions, and even if the guaranties are silent on the matter, North Carolina law imposes joint and several liability on guarantors.  That means that unless the guarantors are liable for a specified amount under a limited guaranty, the lender can hold each individual guarantor liable for the full amount of the borrower's obligation.  Moreover, the lender can choose to sue only one or any number less than all of the guarantors for that full amount, leaving the guarantors to fight amongst themselves to ensure the debt is apportioned fairly.

For example, if a co-guarantor declares bankruptcy, is released from liability by the lender, or simply disappears, the remaining guarantors (or those that the lender chooses to sue) will each remain fully liable for the entire amount of the guaranteed debt. In the event that one guarantor pays, or is forced to pay, the debt in full, that guarantor can seek a claim for "contribution" against their co-guarantors in order to recover those guarantors' portion of the debt.  But no guarantor can force the lender to look to another guarantor for part payment.

The Obligation of Contribution

When two or more individuals guaranty a borrower's obligation and one or more pays, or is forced to pay, more than their relative share, the guarantor who pays more has the remedy of an action for contribution. This action is based on the law recognizing an implied promise by each guarantor to contribute their fair share to the payment of the guaranteed debt in order to meet their common obligation.  Just because the lender chooses to sue only one or less than all of the guarantors, the remaining guarantors are not excused from paying their share of the debt.  Contribution allows the co-guarantors who had to pay more than their fair share to sue to recover from those that did not.

Guaranty of Payment vs. Guaranty of Collection

Guaranty agreements commonly provide that the guaranty is for "payment" and not simply a guaranty of "collection." If the agreement states that it is a "guaranty of payment," then the lender can seek recovery of the debt directly from the guarantor without first pursuing the borrower. On the other hand, if the agreement states that it is a "guaranty of collection," then the lender must exhaust the lender's remedies against the borrower before the lender can seek recovery from the guarantor.  Due to the flexibility that a guaranty of payment grants the lender, almost all guaranties tendered by lenders specifically state that they are of "payment."  It would be rare for a lender to agree to a guaranty of collection only, but, depending on the facts and circumstances, a savvy guarantor of a loan to a prosperous business might be able to negotiate this term.

Lender's Right to Set-Off

If a guaranty agreement provides the lender with a right to "set-off," it means that the lender can "take" funds from the guarantor's account (except for certain IRS or trust accounts), without prior notice, to satisfy the borrower's past due debt.  

For example, a guaranty agreement may state that:

Lender reserves a right of set-off in all of guarantor's accounts with lender including all accounts guarantor may open in the future. Guarantor authorizes lender, to the extent permitted by applicable law, to hold these funds if there is a default and apply the funds in these accounts to pay what guarantor owes under the terms of this guaranty. 

By signing a guaranty agreement with such language, the guarantor is granting the lender permission to withdraw personal funds from the guarantor's account(s) as credit against the obligation of a defaulting borrower.

Death of a Guarantor

Most guaranties survive the death of the guarantor, and any liability will become part of the guarantor's estate. As stated earlier, the only way to avoid liability is by paying the obligation(s) in full, or obtaining a release from the lender.  Typically, a lender will not release an estate from liability, unless the lender agrees to allow another party acceptable to the lender to take the deceased guarantor's place.  It's possible to negotiate a release, or release and replacement, upon death provision in a guaranty agreement if certain factors exist, but such provisions are usually very detailed and require the assistance of an attorney or other professional to draft them.

Before you sign any guaranty agreement, be sure to read all of the terms carefully. Guaranty agreements can easily bind you to more debt than you intended.  Prior to signing, you should always obtain independent legal advice from a licensed attorney who will make sure your intentions are adequately reflected or that, at least, you understand your risks before you sign.  Otherwise, you may find yourself taking on much more than you anticipated.

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Commercial Lease Guaranty Agreement

What is a commercial lease guaranty agreement? Banks require guarantees in case businesses default on loans. 4 min read updated on February 01, 2023

What is a commercial lease guaranty agreement? Banks require guarantees in case businesses default on loans. Personal guarantees require individuals to repay loans personally in case of default. Personal guarantees are now standard.

Commercial leases are commitments; leasing companies want assurances that leases are covered. Premise upgrades cost landlords if the changes discourage new tenants; personal guarantees allow landlords to get some of this cost back. A personal guarantee is unsecured. Personal property is at risk by signing this agreement.

Negotiating a Personal Guarantee on a Commercial Loan

Landlords may negotiate and consider these options:

• Limit the guarantee amount. Landlords demanding rent recovery of the total lease period, plus costs for tenant improvements can be negotiated with. For example, CAM costs could be removed.
• Ask for a time limit on guarantees. Established a track record by offering a guarantee running for three years of a five-year lease.
• Substitute a letter of credit for a set dollar amount; the letter can be tapped if the property's abandoned.
• Pay rent after an early termination.

Courts will award how many months landlords need to re-let the space. Guaranteeing 6 or 12 months cuts through legal negotiations. Understand the laws. Leases are subject to state laws. Check the lease jurisdiction's laws relating to personal guarantees.

A combination of limiting the time and lease amount can be negotiated too. Creative lawyers can help. Minimize financial exposure by knowing a guarantee's details and negotiating before signing a personal guarantee.

Is a Lease Guaranty Enforceable?

Personal lease guaranties are integral to commercial leases . Lease guaranties are contracts where a guarantor agrees to meet the tenant's obligations. Landlords need tenants to meet the lease obligations. Nothing may be collected if tenants are destructive or bankrupt. Bad credit can result in requiring a guaranty from reliable guarantors. Guarantors may be responsible for tenant damages. Guarantors are principal individual owners or corporate affiliates of Tenant entities. Typically, relatives are Guarantors for individual tenants.

Enforceable lease guarantees establish clear obligations . How landlords collect from guarantors, and whether there're monetary limitations to the guaranty should be explicit. Ambiguities are construed in the guarantor's favor.

Guaranties should state that the landlord's entering into the lease in reliance on the guaranty. Both landlord and guarantor must sign the guaranty.

Landlords overlook lease amendments. Some states void lease guaranties modified without the guarantor's consent. New Jersey courts limit or discharge lease guaranties if the modifications injure the guarantor or increase liability. New Jersey hasn't stated what lease modifications increase the guarantor's risk. New Jersey landlords can ensure lease guaranty enforceability.

Landlords should state the guarantor's obligations and explicitly waive guarantors' rights to consent to modifications. Landlords may require guarantors record consent whenever modifications occur. To ensure a guaranty's enforceability, landlords must use explicit forms.

Landlords must consider how amendments affect the lease guaranty enforceability so that it remains effective.

What to Negotiate About a Lease Guaranty

A lease guaranty is one of payment, not of collection, and is to be unconditional. If tenants don't pay, guarantors are liable. When agreeing to a lease guaranty, a guarantor accepts risk. A guarantor's only liable for what a tenant's liable for; however, a guarantor remains liable even if the tenant's relieved of the obligation. The guarantor's still responsible for a lease defective in its execution.

Landlords request guarantors to waive defenses based on the tenant's insolvency, or some “surety” defenses. Guarantors are asked to waive notice of tenant defaults. It's assumed the guarantors and tenants are communicating. This assumption's made even for tenants and guarantors unrelated.

Guarantors could miss updates. Requiring the assignee to notify the original tenant or the guarantor is ridiculous because when the landlord's coming after the guarantor, it means that the assignee can't pay the obligation. The guarantor can't recover damages.

Guarantors should require copies of default notices and not be held liable for amendments made between landlords and unaffiliated tenants.

Landlords could require that guarantors give notice when the tenants are no longer “affiliated.” Landlords ask guarantors to “waive all defenses;" guarantors shouldn't be allowed to claim bankruptcy because tenants can. Guarantors shouldn't pay anything beyond a tenant's responsibility and be allowed to apply a tenant's defenses.

Landlords request guarantors to waive “offsets.” Since the guarantor shouldn't be liable for what the tenant wouldn't have to pay offsets should be available to the guarantor. Guarantors are asked to waive "subrogation" due to concern over a doctrine called Deprizio . This doctrine made landlords return guarantors' payments when guarantors could collect from tenants. Congress changed the law, but guarantors should waive subrogation rights.

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