Don’t Let Settlement Agreement Extinguish Guarantor’s Liability

Q: I’ve been advised to use a “guaranty” as security for the leases with tenants at my office building. How exactly does a guaranty work, and how can I make sure that mine works effectively?

A: A guaranty is an important form of security that commercial property owners depend on if the tenant defaults on its lease obligations. For example, if a building owner and defaulting tenant signed a settlement agreement that required the tenant to pay only a portion of its back rent and other costs, the owner would want to go after the guarantor for the deficiency. However, a guaranty isn’t always a guarantee that you’ll get paid—if the guaranty that you accepted and the settlement agreement the tenant signed were not drafted properly, they could have loopholes that bar you from getting the deficiency from the guarantor.

To minimize the chance of that occurring, you should add language to the guaranty agreement stating that the guarantor’s liability will not be affected by any settlement or compromise agreement signed by the owner and the tenant. (This should include any releases.)

Also, make sure the guaranty says that it will remain in effect even if the lease terminates and regardless of whether the guarantor is notified of a settlement or compromise agreement, and that the guarantor waives its rights to get notices of a settlement or compromise agreement. Ask your attorney about adding this Model Language to the guaranty:

Model Language

Guarantor’s liability under this Guaranty shall not be affected, modified, diminished, or impaired by reason of any dealings, transactions, or matters between Landlord and Tenant that may cause the Lease to terminate, including without limitation, any adjustment, compromise, deferral, waiver, settlement, accord and satisfaction, or release of Tenant’s obligations under the Lease, regardless of whether Guarantor receives notice thereof, all of which notices Guarantor expressly waives.

For tips on negotiating a guaranty with a fair and balanced scope, see “Negotiate Three Limitations on Guarantor’s Obligations,” in the April 2013 issue of the Insider, available in our online Archive.

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