Landlords often request or require personal guaranties for commercial leases, especially for new businesses with limited financial history. The guaranty often creates significant exposure for the business owner. As with any business matter, it is preferable to avoid problems and manage risks with a thorough understanding of the issues and a carefully drafted contract.
Limiting the Personal Guaranty
Personal guaranties can cover all the obligations of a tenant, or they can be limited to only some of the obligation. Limiting guaranties when drafting the lease agreement will give you a potential defense. It also allows you to manage the risks.
For example, parties can limit the time period for which a guaranty applies, the types of obligations a guarantor is responsible for, the maximum financial amount of the guaranty, and many other obligations under the lease. Limiting obligations under a personal guaranty, rather than providing a full guaranty, will put the guarantor in a stronger position if the tenant breaches, needs to get out of the lease, or wants to negotiate a settlement.
Failure to Bind Marital Community
Another defense available to a personal guaranty in Arizona is a failure to bind the marital community. To bind the marital community, both spouses must sign the personal guaranty. Property acquired during the marriage is generally presumed to be community property, so a failure to get both spouses to sign a guaranty could make it virtually worthless.
Arizona landlords and legal practitioners will generally be aware of this, but sometimes spousal signatures are not requested. Out-of-state practitioners may occasionally be unaware of this fact. It is an important defense to evaluate if there is a breach of a guaranteed lease.
Other Defenses to a Personal Guaranty
It is important to remember that the guaranty liability is dependent on something being owed on the underlying lease. The guarantor may also be able to escape liability if it can be shown the landlord failed to satisfy obligations under the contract. If the landlord is in breach, that may be a strong defense.
In some cases, the guaranty can be limited to the original risk that was undertaken. There may be a defense if the creditor (landlord) and debtor (tenant) made modifications to their agreement, increased the guarantor’s risk, and did so without informing the guarantor.
Finally, a landlord will generally have a duty to mitigate damages incurred as a result of the debtor’s default. For example, the landlord must make a reasonable attempt to find a new tenant to occupy the property. If a new tenant comes in, that reduces the loss and the guarantor’s exposure. If the landlord fails to take reasonable steps to find a replacement, that may limit the guarantor’s liability.
Ultimately, the defense available to a guarantor will depend on the unique facts of a specific situation, as well as the language in the contract.
Chernoff Law handles business and real estate litigation in Arizona, including disputes related to commercial leases and personal guaranties. Contact us to discuss your legal issues with an experienced business attorney.