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What are the best practices for enforcing a personal guaranty in a lease default?

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A personal guaranty is a common way for landlords to secure the payment and performance of a tenant under a commercial lease. However, if the tenant defaults on the lease, the landlord may face challenges in enforcing the guaranty against the guarantor, who is usually the tenant's owner or principal. In this article, you will learn what are the best practices for enforcing a personal guaranty in a lease default, and how to avoid some common pitfalls and risks.

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1 Review the guaranty terms

The first step in enforcing a personal guaranty is to review the terms and conditions of the guaranty agreement. Not all guaranties are created equal, and some may have limitations, exclusions, or defenses that could affect the landlord's ability to recover from the guarantor. For example, some guaranties may be conditional on the landlord exhausting all remedies against the tenant first, or may be limited to a certain amount or duration. Some guaranties may also have waivers, releases, or indemnities that could benefit or harm the landlord. Therefore, it is important to understand the scope and enforceability of the guaranty before taking any action.

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Michelle Behnke

Senior Counsel Boardman Clark American Bar Association President-elect
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Some guaranties are voided if the terms of the original lease are changed without the consent of the guarantor. So extending the lease term or releasing security may prevent enforcement against the guarantor.

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2 Notify the guarantor of the default

The next step in enforcing a personal guaranty is to notify the guarantor of the tenant's default and demand payment or performance under the guaranty. This step is essential to preserve the landlord's rights and remedies, and to put the guarantor on notice of the landlord's claims. The notice should include the details of the default, the amount due or the obligation breached, and the deadline for curing the default or paying the debt. The notice should also refer to the guaranty agreement and state that the landlord intends to enforce the guaranty if the default is not cured or paid.

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Patrick Cox

CRE veteran with 20 years in the C-suite of various development companies. Extensive & practical ‘A to Z’ development cycle experience, with emphasis on capital raises, project development, and corporate management.
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As a practical matter, it is always helpful to try and work through the guarantor’s attorney. This helps in trying to avoid letting the situation “become personal”. In my experience, once the situation does become personal, perspective is lost and the chances of a positive, or even ‘reasonable’, outcome is greatly diminished.

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3 File a lawsuit against the guarantor

If the guarantor fails to respond or comply with the notice, the landlord may file a lawsuit against the guarantor to enforce the personal guaranty. The lawsuit should be based on the breach of contract theory, and should allege that the guarantor agreed to pay or perform the tenant's obligations under the lease, that the tenant defaulted on the lease, that the landlord notified and demanded the guarantor to pay or perform, and that the guarantor failed or refused to do so. The landlord should also seek damages, interest, costs, and attorney fees, as allowed by the guaranty agreement and the law.

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4 Collect the judgment from the guarantor

If the landlord obtains a judgment against the guarantor, the final step in enforcing a personal guaranty is to collect the judgment from the guarantor's assets. This may require additional legal action, such as garnishing the guarantor's wages, bank accounts, or receivables, or attaching or foreclosing on the guarantor's property, such as real estate, vehicles, or equipment. The landlord may also use post-judgment discovery tools, such as interrogatories, requests for production, or depositions, to locate and identify the guarantor's assets and income sources. The landlord should act quickly and diligently to collect the judgment, as the guarantor may try to hide, transfer, or deplete his or her assets to avoid paying.

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Patrick Cox

CRE veteran with 20 years in the C-suite of various development companies. Extensive & practical ‘A to Z’ development cycle experience, with emphasis on capital raises, project development, and corporate management.
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Even after a judgement has been obtained, in several states, it must also be perfected/recorded. This is the practical step that allows for the Creditor to seek relief via the guarantor’s assets.

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5 Avoid common mistakes and risks

Enforcing a personal guaranty in a lease default can be a complex and challenging process, and there are some common mistakes and risks that landlords should avoid. For instance, landlords should not accept partial payments or modifications from the tenant without obtaining the guarantor's consent, as this could release or impair the guaranty. Landlords should also not delay or waive their rights to enforce the guaranty, as this could create statute of limitations or estoppel issues. Landlords should also be prepared to face counterclaims or defenses from the guarantor, such as fraud, duress, unconscionability, or lack of consideration. Landlords should consult with an experienced commercial real estate attorney to help them navigate the legal and practical aspects of enforcing a personal guaranty in a lease default.

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Bert Spence

Commercial, Bank and Financial Services, Real Estate, and Product Liability/Personal Injury Defense Litigation; Experienced Arbitrator
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It is important to not give up too quickly on establishing personal recourse against a Guarantor. Many commercial real estate loans are "non-recourse," meaning that unless something unusual occurs, the lender's only avenue in the event of a default is to foreclose on the real property and to take any personal property pledged via Article 9 security interests. But most non-recourse loans have exceptions to the "non-recourse" provisions, colloquially referred to as "bad boy carve-outs." In other words, if the Borrower has broken a specified "rule" in the loan agreement, the underlying debt becomes personally collectible against the Guarantor. Discovery and investigation in a lawsuit against the Borrower can uncover these recourse triggers.

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Tony Wood, SIOR

exp Commercial Real Estate Expert in Sales, Leasing, Valuation & Negotiation, Lender Special Asset Consulting, Commercial REO Specialist, Asset & Sales Management, Contract Negotiations, Marketing & Training
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It's actually rather obvious that this is an AI generated article. Fortunately, it still requires human experience in these matters to fully explore, determine and outline the multiplicity of possibilities of such events as a default with a guarantor. For example despite the fact that you have the right to file a lawsuit and collect from the guarantor in California a landlord has a requirement to mitigate damages this would include a variety of possibilities that would require one with experience in these matters to fully comprehend and outline the options and steps to success for the landlord. These actions would require analysis and knowledge of market conditions, the property's occupancy, type of space, condition and marketability

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Nick Gething

Professional with varied customer service experience
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It needs to be made clear which jurisdiction you are dealing with. Much of what has been stated can apply in England & Wales as well as the US, but English Law has the added complexity of Authorised Guarantee Agreements, when leases have been assigned as well as the process of commencing proceedings in the courts needs to be clarified. The terms used and processes do not automatically translate from one to the other.

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What are the best practices for enforcing a personal guaranty in a lease default?

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2

3

4

5

6

1 Review the guaranty terms

2 Notify the guarantor of the default

3 File a lawsuit against the guarantor

4 Collect the judgment from the guarantor

5 Avoid common mistakes and risks

6 Here’s what else to consider

Commercial Real Estate

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What are the best practices for enforcing a personal guaranty in a lease default?

1

2

3

4

5

6

1 Review the guaranty terms

2 Notify the guarantor of the default

3 File a lawsuit against the guarantor

4 Collect the judgment from the guarantor

5 Avoid common mistakes and risks

6 Here’s what else to consider

Commercial Real Estate

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