Keep Guarantors on the Hook for Attorney’s Fees
Guaranty agreements may cap how much the guarantor has to pay if the tenant defaults. For example, the agreement may say that $100,000 is the most the landlord can collect from the guarantor. If you include dollar caps in your own lease guaranties, just be sure that they exclude attorney’s fees, cautions a New York City leasing attorney.
Problem: Attorney’s Fees May Count Against Cap
While many guaranties that contain dollar caps require the guarantor to reimburse the landlord for the legal costs it incurs in enforcing the guaranty, they often omit language indicating whether those costs count against the cap. Then, if a dispute arises, the court is likely to resolve it by including the costs in the cap. That’s a problem because the guarantor would then be obligated to pay those fees only if the cost of curing the tenant’s default doesn’t already exceed the cap amount. If there’s no money for legal fees left over after the cure, the landlord gets stuck having to pay the lawyers out of its own pocket.
Example: A tenant owes $110,000 in back rent. The guaranty, which requires the guarantor to pay attorney’s fees, has a cap of $100,000. The landlord pays a law firm $20,000 to sue the guarantor to make good on the guaranty. Result: The guarantor is liable for $100,000, leaving the landlord with $30,000 in unreimbursed expenses--$10,000 in unpaid rent + $20,000 in attorney’s fees.
Solution: Specifically Exclude Attorney’s Fees from Cap
If you can’t avoid a cap, be careful to avoid ending up in this situation by including a clause in the guaranty agreement that specifically excludes attorney’s fees from the cap. While this might sound like a minor detail, landlords often have to hire an attorney and take legal action to get guarantors to pay anything. Ask your attorney to adapt this model language for your guaranty agreements:
Guarantor shall, on demand, reimburse Landlord for all expenses, including, without limitation, reasonable attorney’s fees and disbursements, incurred by Landlord in enforcing this Guaranty or any provision thereof. Such reimbursement shall be in addition to any and all amounts payable by Guarantor pursuant to Paragraph [insert par. # and dollar cap amount] above, and shall not be subject nor applied to the limitation set forth therein.