5 Things to Remember Before Guarantying a Commercial Real Estate Loan*

June 14, 2019

Guarantee agreements are powerful documents, oftentimes giving lenders nearly unfettered ability to pursue guarantors and their assets. Nevertheless, instances abound of highly sophisticated guarantors signing these agreements without a complete understanding of the consequences of default. This article sets forth some of the primary risk factors that tend to be overlooked. It bears noting that, in theory, guarantees are negotiated contracts (albeit very one-sided ones), and in increasingly rare instances a guarantor with sufficient clout may be able to induce the lender to lessen the severity of the guaranty. In such instances, some of the below items would be inapplicable. However, in the majority of full recourse guaranty agreements (to be more specific, the majority of agreements seen by this author), lenders usually insist upon the following:

  1. Lender is Not Required to Foreclose First. Provided that the guaranty is unconditional and its terms give the lender the right to do so, the lender may, and often does, obtain a money judgment against the borrower and/or guarantor before commencing a foreclosure action against the borrower. Summit Trust Company v. Willow Business Park, L.P., 269 N.J. Super. 439 (App. Div. 1994); Lenape State Bank v. Winslow Corp., 216 N.J. Super. 115 (App. Div. 1987).

  2. Guarantor Not Entitled to FMV Credit if Property Not yet Sold. If the lender brings an action on the guaranty before commencing a foreclosure proceeding, the guarantor is not entitled to deduct the fair market value of the property from the amount of the judgment in the guaranty action. Summit Trust Company v. Willow Business Park, L.P., 269 N.J. Super. 439 (App. Div. 1994).

  3. Lender Not Required to Pursue Borrowing Entity First. Provided that the guaranty is unconditional, the lender can bring an action against one or more guarantors without first suing the borrower. Summit Trust Company v. Willow Business Park, L.P., 269 N.J. Super. 439 (App. Div. 1994); Lenape State Bank v. Winslow Corp., 216 N.J. Super. 115 (App. Div. 1987).

  4. Guarantor Remains Liable Even if No Longer an Owner of Borrower. Lenders often require that each equity owner in the borrowing entity execute a guaranty. If one of the equity owners who is a guarantor sells his interest back to the borrowing entity or gets bought out by the other partners, that does not automatically relieve him of liability under the guaranty. Unless the lender agrees to release him, the guarantor remains liable on the guaranty, regardless of whether he still owns equity in the borrowing entity.

  5. Guarantor is Liable for Entire Guaranty Amount. In the vast majority of guarantees, the lender requires that, if there are multiple guarantors, each guarantor is jointly and severally liable for the full amount of the obligation. This means that while a guarantor might only have a 25% interest in the borrowing entity, he is liable for the full amount of the guaranty, not just 25%. While that guarantor would have the right to reimbursement from his co-guarantors in the event he had to pay the entire obligation amount, that right would be worthless if the co-guarantors do not have sufficient assets.

*This article only apply to guarantees that are governed by New Jersey law.