Safeguard Effectiveness of Tenant’s Guaranty

June 8, 2017
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At first, a guaranty from a tenant that you’re unsure about seems like a great safety net. Another party will take over the tenant’s lease obligations if it fails to do so itself, so you won’t be left on the hook trying to mitigate the financial or other damage. In isolation, a guaranty with no limits can work well. But you’re likely to find tenants and their guarantors demanding certain limits on guaranties. There are several common limits they may ask for.

You can avoid giving up too much—and getting burned in the process—by combating these limits on guaranties. One common limit a savvy tenant and its guarantor may demand is that the guarantor’s liability be capped at a specific dollar amount. If you agree in the lease to accept a “dollar cap” limit, safeguard your interests by setting the cap high enough to cover at least your out-of-pocket lease costs. Although this may be a fraction of the total rent the tenant owes, it will cover your downside if the tenant commits a violation early in the lease. These out-of-pocket costs include: broker’s commissions, build-out costs and/or tenant improvement allowances, takeover costs (if you must buy out the tenant’s existing lease to get it into your building or center), and rent concessions (for example, free rent).

Remember to make sure that the cap doesn’t apply to certain costs. For instance, don’t cap your collection costs or attorney’s fees. Otherwise, you’ll lose money for enforcing the lease or guaranty. And don’t cap the amount the guarantor owes you for the tenant’s environmental contamination at the space, because environmental claims against you could be very large. Also, don’t let the guarantor cap the amount it owes for losses you suffer because the tenant’s conduct is negligent or intentional—for example, if the tenant intentionally sets fire to its space.

For more safeguards and model lease language that will ensure an effective guaranty, see “Don't Let Tenant's Limits Render Guaranty Useless,” available to subscribers here