Guaranteeing Success in Your Commercial Real Estate Guaranty Agreements

A typical commercial real estate transaction will involve a loan when purchasing the commercial real estate. The most common loan documents that a borrower will see include a promissory note, deed of trust and guaranty agreement. However, there can be many more loan documents associated with a transaction.

Lending money involves financial risk and one way that commercial real estate lenders manage that risk is through guaranty agreements. A guaranty agreement creates a separate personal obligation for the guarantor that adds an additional layer of security for the lender. The borrower in a commercial real estate transaction is generally a special purposes entity (SPE) that's sole purpose is owning and managing the commercial real estate subject to the loan. Therefore, lenders normally require a separate warm-bodied and creditworthy guarantor to guaranty all or a part of the borrower's loan obligations. The guarantor is usually an owner of the borrower entity because the owner has a direct benefit from the loan to the borrower.

A lender will typically have a standardized form of guaranty agreement that is prepared by the lender's attorney. It is important for a borrower to make sure its attorney is involved during the loan application and commitment stage because this is where the loan terms are negotiated with the lender. After the loan commitment is signed, it is often too late for a borrower to renegotiate many of the pro-lender provisions that are included in the lender's loan documents.

Negotiating a guaranty agreement requires an understanding of the key terms in the loan commitment and confirming that it accurately reflects the parties' intent in the loan commitment. Guaranty agreements can secure debt payment, performance of the borrower's obligations or both. Most commercial real estate loans require specific events and prohibited acts to trigger recourse liability for the borrower and its guarantor(s).

When negotiating a guaranty agreement, it is important to consider the transaction from both the lenders and borrower's point of view. The lender wants the guaranty agreement to fill in any gap in the loan documents with the borrower. The less revisions a borrower makes to the guaranty agreement, the more the lender benefits.

When negotiating a guaranty agreement, a guarantor and its attorney should do the following:

• Carefully read the guaranty agreement and make sure that the guarantor understands its obligations, risks and liabilities.
• Make certain that all covenants contained in the guaranty agreement are unambiguous and can be performed in the time and manner provided and remove any covenant that is unperformable.
• Confirm that all representations contained in the guaranty agreement are true and limit any overly broad representations.
• Verify that the guaranteed obligations of the guarantor are specifically defined and ensure that liability is excluded for any obligation not included in the defined term of guaranteed obligations.
• Limit any waivers required by the lender, when possible.

Some important guaranty agreement provisions to focus on include:

1. Covenants. The guarantor often has some direct loan obligations, such as causing the borrower to provide required financial reports and maintaining certain net worth requirements. Guarantors can often negotiate the method, frequency and consequences for a breach of these covenants.
2. Representations and Warranties. The guaranty agreement will require the guarantor to make certain representations and warranties. The guarantor's attorney should work with the guarantor to revise any representations and warranties that are inaccurate and make sure they accurately reflect the facts of the deal.
3. The Guaranteed Obligations. The guaranteed obligations in a guaranty agreement are the affirmative and negative covenants of the borrower. The guarantor becomes liable under the guaranty agreement when a borrower breaches the guaranteed obligations. This is why it is important for the guaranteed obligations to be clearly defined. A guarantor and their attorney should verify this to ensure that there are no ambiguities, and it is clear when the guarantor's liability is triggered.
4. Liability. A guarantor and their attorney should try to reduce and remove liability, when possible. Events that are outside of the borrower's control or based on the lender's subjective discretion should be negotiated so that they do not trigger liability for the guarantor even if they may be a default under the loan documents.
5. Notice and Cure Periods. A guarantor and their attorney should confirm that the lender cannot accelerate the loan until it sends the borrower a default notice and waits until the cure period expires. Sometimes, a lender will even agree to give the guarantor the right to cure the loan default.
6. Term of Guaranty. The term of the guaranty should specifically state when or what conditions cause the guarantor's obligations to terminate.
7. Waiver. Guaranty agreements often require guarantors to waive many rights and defenses available to them at law and in equity. When possible, a guarantor's attorney should negotiate to remove certain statutory waivers.

While there are many more provisions of a guaranty agreement that could have been covered in this article, it is important for a borrower and guarantor to seek an attorney to help negotiate their loan documents.