Most businesses lease commercial space under the name of the corporate entity if the business operates as such. It is not unusual for a landlord to require the principals of the business-tenant to execute security instruments called guarantees. These instruments serve to allow the landlord to sue the principals of the business- tenant (“Guarantors”) in the event the business-tenant defaults on its lease obligations. If you are presented with a Guaranty along with the proposed lease. Please be aware that it is more than likely that you will be presented with a document that not just a guaranty but is in fact a suretyship. A simple guaranty with the minimal requirements would allow the landlord to sue the guarantors in the event the landlord sued the business-tenant, acquired a judgment but such judgment was not satisfied (the business-tenant did not pay).
Guarantee v. Suretyship
However, the typical landlord’s ‘Guarantee’ provided to a commercial tenant is a Suretyship, wrapped in sheep’s clothing. It will contain onerous clauses which don’t require that a judgment first be acquired and will force you to waive important rights that you don’t necessarily have to accept.
The Difference Is Crucial.
A surety binds himself to perform if the principal does not, without regard to his ability to do so. His contract is equally absolute with that of his principal. They may be sued in the same action, and judgment may be entered up against both.
A guarantor, on the other hand, does not contract that the principal will pay, but simply that he is able to do so; in other words, a guarantor warrants nothing but the solvency of the principal. Before an action can be maintained against a guarantor, therefore, it must he shown that the principal is unable to perform. The surety says to the creditor: If your debtor will not pay, I will pay. The guarantor says to him: Proceed first against the principal, and, if he should not be able to pay, then you may proceed against me. It has been said that there is no instance in the books of a guarantor contracting jointly with his principal. Much has been written upon this subject, but we think the above expresses the true distinction between the two classes of contracts.” Manry v. Waxelbaum, 108 Ga. 17. 33 S. E. 703. This is a law going back to 1890 in the Virginia case of Piedmont Guano & Manufacturing Co. v. Morris and Als. 86 Va. 941 (1890).
So, if you sign an actual guaranty, the landlord would first be required to sue the tenant, win, attempt to collect the debt, and failing to collect could then sue the guarantor. That is not the document you will be initially provided. The Landlord’s ‘guaranty’ will typically allow them to first sue you personally, without even filing a lawsuit against the tenant (the company), among other drastic rights against you.
What will likely be provided is an instrument in which you allow, as stated above, the Landlord to sue you first, but will include other onerous clauses such as:
- Allow the Landlord to change the amount or time of payments due without notice to you;
- Modify any of the terms of the lease without notice to you;
- Force you to waive notice, presentment, dishonor, counterclaims, interpose substantive or procedural defenses; and,
- Waive any right to a trial by jury.
Negotiate your Guarantee
We have found that landlords are often open to discussing limitations on liability of a guarantor. If presented with the standard form don’t accept it as presented, allow your attorney to negotiate a reasonable document
Contact Fox and Moghul To Review Your Commercial Lease Before Signing.
An experience real estate attorney will know the extents to which your rights can be strengthened through negotiation. These are complex legal instruments and you are strongly advised to allow an attorney to review these arrangements prior to execution, including the drafting and execution of letters of intent. If you are considering a letter of intent or commercial lease, please call Fox & Moghul to discuss and advise you. We have decades of experience in this area and will be pleased to be of assistance.
