ABC’s of Lease Guarantees

Whether you’re a landlord hesitant to sign a lease with a startup that lacks a financial track record, or a tenant struggling to find a space because of a past lease dispute, the solution is often the same. When there’s a gap in trust or a red flag in a tenant's history, a lease guaranty acts as the bridge. It provides the security a landlord needs to feel comfortable and gives the tenant a path forward to prove their business's viability.

A lease guaranty is an agreement between the landlord and a third party whereby the third party agrees to take responsibility for the tenant’s defaults under the lease. Essentially, the guarantor of a lease is a financial safety net for a landlord that allows the landlord to pursue the tenant and the guarantor for a breach of the lease. This typically involves the paying of rent but also includes performance of other terms of the lease. A guarantor can be a corporation, bank, or individual. Typically, the guarantor will have a strong credit history and financial stability.

While there is no “magic language” used in creating a lease guaranty, the terms of a guaranty typically include a promise to perform and be liable for the obligations and liabilities of a lessee under a lease. From there, guarantees may include a liability cap, an agreement that the landlord may pursue the guarantor first before pursuing the tenant, and a time limit on how long the guarantee will remain in effect among other terms. 

Guarantees can also come in several different forms depending on the landlord’s and tenant’s respective financial conditions and bargaining power. A full or absolute guaranty is typically favored by the landlord as, like it sounds, it requires the guarantor to cover all of the tenant’s obligations under the lease which includes not just rent but other non-monetary covenants. A limited guaranty is typically favored by the tenant since, again like it sounds, it covers partial obligations under the lease – typically just payment of rent. These often contain an expiration date; e.g., the guaranty expires 5 years into a 10 year lease. There are also “bad acts” guarantees, which spring up only after the occurrence of a specified event, which may include fraud, waste, or bankruptcy. Finally, there are “good guy” guarantees, where the guarantor’s liability is terminated if a tenant surrenders the premises.

Given the legal ramifications of a guaranty, it is important that both the landlord and tenant carefully read the guaranty and consult with counsel to understand the implications of the guaranty.   Contact the Blake Law Firm if you have further questions by email (info@blakelawca.com) or phone (858) 232-1290.

Disclaimer: This blog post is intended for informational purposes only and does not constitute legal advice.