PERSONAL GUARANTEES:
AN ANCHOR THAT CAN BRING DOWN THE UNSUSPECTING
6.30.08
By: Stephen J. Nash
Nash
& Lodge, PLLP
nash@nashandlodge.com
Many participants in the real estate market have signed personal guarantees in the course of doing business.
It may have been in connection with purchasing property or borrowing money for a business. At the
time the risk did not seem great and it was just part of doing business. Today many individuals in the
real estate world, even if they are doing well, are looking at their personal guarantee(s) as anchors that may bring them
down even they are otherwise doing well.
A Personal Guarantee – What’s the Big Deal?
A personal guarantee is an agreement that makes an individual liable for a third parties debt or obligation.
One of the most common situations where a personal guarantee is found is when a corporation, limited liability corporation
or partnership borrows money. The lender does not want to rely on a corporate entity that may have no assets
and will require that the owners all sign a personal guarantee so that they cannot use the corporate shield to avoid having
to pay the debt. Another common situation where a personal guarantee will be required is where the borrower
cannot qualify for a loan and needs a third party to guarantee a loan.
Many
guarantees were signed with little thought because there was no perceived risk, especially when real estate was involved.
Why would they ever look to me to pay the debt when they can always go after the real estate that more than covers
the debt? Of course, today we are learning that the assumption that real estate values will always rise
or at least remain the same is not true.
What is even
more troubling is that many of the outstanding personal guarantees were given in connection with a business that the person
giving the personal guarantee is no longer involved in. Unless a release was given by the lender the mere
fact that a person leaves a business does not relieve him/her of liability if they signed a personal guarantee.
So even though that person obtains no benefit from the business and has no control over the business, the lender can
still go after him/her if the business defaults on its obligations! Not a pleasant thought but it is a
situation that many in real estate are facing right now.
If a person leaves
a business and cannot obtain a release from the lender on the personal guarantee another option is to obtain an indemnity
agreement from the person buying his/her interest or from the other owners. While it will not stop the
lender from knocking on your door, it will allow you to seek payment from the buyer of your interest or the other owners if
the lender does seek payment from you. Of course, this will not provide much comfort if the person/s who
gave the indemnity have no ability to pay.
Another important factor to remember
when it comes to personal guarantees is that they are generally drafted so that the lender can go after all of the individuals
who signed personal guarantees or the lender can seek payment of the entire amount from any one of the guarantors.
While the lender is going to seek payment from all of the guarantors, as a practical matter, they will focus on whoever
is most vulnerable to collection. That guarantor is now put in a position where he/she must go after his/her
fellow guarantors to receive reimbursement for the amounts paid over his/her share.
Lessons Learned
The first thing everyone who has
been involved in business should check to see what personal guarantees they have signed and what are the terms of the guarantee.
Next everyone who has left a business in any manner should check to see if personal guarantees were signed, what are
the terms of the guarantee, whether they were released from the personal guarantee by the lender and did the buyer of your
interest or the remaining owners of the business agree to indemnify you if the lender sought payment from you.
If you have outstanding personal guarantees you must carefully evaluate the likelyhood
of default by the business, the value of the assets of the business, the remaining amount of debt, the financial situation
of the others who signed guarantees, review the terms of the guarantee that you signed and evaluate what assets you own that
are subject to collection.
If you are in a business or partnership that you
or others may leave make sure you take into account the personal guarantees that were signed. Leaving a
business without dealing with the personal guarantees that you have signed is like leaving a farm after stepping into a cow
pie, while you may have left the farm the crappy part of the farm is still with you.
If you are asked to sign a personal guarantee you must review the terms of the guarantee
to evaluate the risk you are taking. In most cases you will not be able to convince the lender to not require
the guarantee you often can negotiate the terms of the guarantee. This is significant in that the guarantee
presented to you most assuredly has been drafted exclusively for the benefit of the lender. Going into
a business or into a purchase everyone looks at the potential upside but you are doing yourself a disservice by not evaluating
the potential downside so that you can best protect yourself from the fall-out.
Evaluate,
Negotiate and Plan
A lawyer can help you evaluate your situation
and help protect your interests before you sign the personal guarantee, when you are planning on leaving a business or even
when you left your business but still have outstanding guarantees. As real estate values continue to fall
and the economy continues to struggle more and more individuals are going to get a real life education as to the consequences
of signing a personal guarantee. Instead of learning the hard way, it is best to evaluate and negotiate
the personal guarantee before signing it and, once you have signed a personal guarantee, having a plan to put yourself in
the best position in case the lender looks to you for payment. The best way to properly evaluate, negotiate
and put a plan together is to hire an experienced attorney to work with you to put you in the best position possible.
