Lease Guaranties When They Should Be Used; What They Should Say and How to Preserve Them

It is commonplace for landlords to require guaranties of their tenants’ lease obligations. Such guaranties are useful to almost all landlords, whether the lease in question is for a large “anchor tenant” in a shopping center or a much smaller transaction, such as, for example a parent who guaranties a lease for his or her college student child.
In the commercial setting, guaranties are particularly useful when the tenant is a corporation, limited liability company or the like. In such cases, a guaranty binding the principals of the business/entity owners serves the purposes of both providing credit security to the landlord and incentivizing the business to prioritize rent payments in times, whether temporary or terminal, when there may not be enough money for all creditors. Asking for a guaranty also may serve as a vetting process. The tenant whose principals won’t guaranty a lease may not be the tenant for you. A guaranty may also save the day if your corporate tenant files for bankruptcy.
Unthinkingly requiring a guaranty may not be a silver bullet either. In choosing whether and who to hold as a guarantor, reviewing the financial standing, and, in the case of an individual guarantor in Pennsylvania, the marital status of the proposed guarantor, is a must. A “judgment proof” guarantor is no better than no guarantor.
Guaranties can be limited or unlimited in nature. An unlimited guaranty provides that the guarantor pays all amounts due by the tenant under the lease. A limited guaranty may provide that certain amounts, such as base rent, are covered while others are not, or more commonly may provide that the guaranty only lasts for a certain amount of time. For example, guaranties are often thought to be most useful with a new tenant and some landlords will require a guaranty of the lease for the first few years of a lease (or for the first term of the lease, if the lease has extensions) provided that the tenant has not defaulted in that time. This approach is thought to protect the landlord until the tenant has a proven track record.
In Pennsylvania, again in the commercial setting, an important and common provision is the “warrant for confession of judgment”. Subject to certain rights of the guarantor to attempt to “open” or “strike” the confessed judgment this allows the landlord to skip to the end of the court process by getting an immediate monetary judgment against the guarantor. Pennsylvania is one of the few jurisdictions to allow for such a confessed judgment and a landlord should strongly consider including one in its guaranty.
One problem with a lease guaranty is that the guaranty can be lost or released without the landlord being aware of it. A material change to the underlying lease, such as an unscheduled increase in rental payment, an expansion of the leased premises, or a lengthening of the term not provided for in the lease, raises a question regarding whether the landlord can enforce the new provisions of the lease against the guarantor and sometimes whether the landlord can enforce the guaranty at all. To combat this, guaranties usually include language saying that the guaranty applies to all amendments, modifications and extensions and further state that the guarantor waives any so-called “suretyship” defenses that the guarantor might otherwise have if the lease is modified. Although it would seem unnecessary, guaranties will also usually provide that the bankruptcy of a tenant will not affect the obligation(s) owed by the guarantor under the guaranty.
While putting protective provisions in the guaranty can be of help, there is only so much that careful drafting can achieve in protecting the landlord when the lease is modified. The best course of action if you are a landlord who holds a guarantied lease is to make sure that any change to the underlying lease is in writing and to further ensure that the guarantor, as well as the tenant, has signed the document that modifies the lease.
— Rod Fluck

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