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Issues Regarding Lease Guaranties

By:  Santiago J. Padilla, Esq.

Purchasers of commercial real estate must be cautious when purchasing rental real estate, especially if the real estate has a personal guaranty of the tenant on which they are relying. In the typical case, the buyer is interested in purchasing the commercial property especially because there is a corporate tenant with a long-term lease and the shareholders of the corporate tenants have signed a personal guaranty securing all of the obligations under the lease agreement. The buyer, however, must consider the following because that personal guaranty of the shareholders may become void and unenforceable if it does not contain the appropriate language.

Specifically, under Florida law, whether or not a guaranty is enforceable by assignees of the principal requires us to determine what type of guaranty it is. The law distinguishes between types of guaranties. The various types of guaranties to be considered include general vs. special; conditional vs. absolute and continuing. A "general guaranty" may be enforced by any party to whom it is presented. A "special guaranty" is one addressed to a particular person, firm, or corporation. An "absolute guaranty" is one that does not attach conditions for enforcement. A "conditional" guaranty is one which is not enforceable until certain conditions precedent have been met. A "continuing guaranty" is one that remains in effect until revoked.

When a guaranty by its language runs only to one person or entity, and not to any of its heirs, successors and/or assigns, then that guaranty is a "special guaranty." Generally, in order for a guaranty to be a "general guaranty," it must contain "successors and/or assigns" language after the name of the principal or party to whom the guaranty is designed to benefit.

This is important because under Florida law, a special guaranty is usually not assignable. Lee v. Rubin, 117 So.2d 230 (Fla. 2d DCA 1960); Brunswick Corp. v. Creel, 471 So.2d 617 (Fla. 5th DCA, 1985); Rizzi v. Service Development Corp., 354 So.2d 898 (Fla. 4th DCA, 1978); Greene v. Bursey, 733 So.2d 1111 (Fla. 4th DCA, 1999). A special guaranty becomes unenforceable if it is assigned. However, a general guaranty is assignable and enforceable by assignees of the principal.

Yet, there are certain exceptions to these general rules that have been carved out by the courts. First, Florida courts have stated that a "special guaranty" will be enforceable by an assignee of the principal whenever the assignment was shown to have been made after a breach giving rise to the liability. Tobin v. Iowa Home Mut. Cas. Co., 209 So.2d 485 (Fla. 3rd DCA, 1968). Therefore, if this case appears to expand the enforceability of a "special guaranty" in certain situations. So much so, that one Florida court has held that the assignee of a special guaranty may enforce the guaranty as to "debt resulting from credit extended by the original creditor to the debtor, whether or not that assigned debt is due or past due at the time of the assignment." New Holland, Inc. v. Trunk, 579 So.2d 215, 219 (Fla. 5th DCA, 1991).

Second, courts in other states have held that a guaranty with language that is very generalized is a "general guaranty" because of the broad sweep of the commitment provided. For example, in the case of Gateway Frontier Properties, Inc. v. Selner, Glaser, Komen, Berger and Galganski, P.C., 974 S.W.2d 566 (Mo. App. E.D., 1998), which is a case where the landlord assigned the lease to a subsequent buyer of the property, the Court held that the guaranty was a "general guaranty" and thus properly assignable by the former landlord. That guaranty stated as follows:

"The undersigned [guarantors] having a financial interest in the Tenant named in the forgoing lease, hereby unconditionally and irrevocably (and jointly and severally if there be more than one) guaranties [sic] the prompt and complete performance by Tenant of all of the obligations and covenants of Tenant as set forth in the Lease. This guarantee shall remain in full force until all of the obligations of Tenant have been fully performed or otherwise discharged."

Gateway Frontier Properties, 974 S.W.2d at 568. Oddly enough, during negotiations of the original guaranty, the original landlord and the guarantor had stricken language in the guaranty providing that the guaranty would inure to the successors and assigns of the landlord. For some reason, the Court still found that the guaranty was a "general guaranty" and ignored that language.

In this respect, if a guaranty contains fairly broad language, such as providing that it is "irrevocable and unconditional" and that the guarantor will not be discharged under any circumstances, then it may be held to be a "general guaranty" at least under the Gateway Frontier Properties analysis.

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If you have any questions regarding commercial leases, guaranties or real estate law matters, please contact Santiago J. Padilla through the internet or at 1-800-483-7197.

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