How current events impact business & real estate

Saturday, July 23, 2011

Not all lease guarantees are the same

While reading the law journal on this HOT Saturday afternoon I am reminded of a frequent problem in negotiating a lease; strict norms in defining terms of art always restrict creative thought. Be creative in negotiations.

What do I mean?
Often agents, landlords and tenants are so accustomed to how something was previously done that they forget that the purpose of a lease, which is a contract, is to tailor rights and remedies as the parties deem fit in their own unique situation.

What is a guarantee?
In essence, a guarantee is a third-party insuring the debt of a first-party to an agreement. Yet, the case that I am currently reading gives great insight to the job of a real estate agent. This case is about a guarantee of only the first $50,000, not the entire lease, which in the case damages were awarded in the amount of $510,510; a substantial difference. Here, the tenant was liable for the entire $510,510, but the landlord could only collect from the guarantor the first $50,000 and nothing more.

What is the lesson?
A guarantee doesn't need to be for the entire amount contracted between the parties. It can be for whatever amount provides the landlord with adequate additional security in the deal. A guarantee is a contract in of itself and its terms should be carefully negotiated. The key is to be creative. In this case the guarantee was limited to $50,000 even though the language also included attorneys' fees. This means that even though the debt was over $500,000 and attorneys' fees were a lot more, only $50,000 was guaranteed. We often forget in our business to explore the why instead of the what. Yes, landlords will say we want a guarantee; the what. Yet, the question is why? For additional security in the tenancy because the tenant is not credit worthy? Maybe. Or, maybe its just to motivate the tenant not to default because they need a push. If that is the case, getting a guarantee from someone the tenant respects and is ashamed to let down would be enough even if that person is not wealthy enough to guarantee the lease and maybe that person will not need to be on the hook for the whole amount to accomplish this if its the only way to convince the person to provide a guarantee.

The lesson of this blog is to always not assume that something means what you think it does. A guarantee, can be limited to a Good-Guy Clause where the guarantee only covers use to date of exit from the premises or a guarantee can, more importantly, mean anything that the negotiating parties want it to. Stop trying to speak like a lawyer and use terms of art. Instead, think about what the parties want to agree to by talking to each of them about their concerns and desires and find the terms of art to reduce it to writing later or better yet, hire a good lawyer to do that later.

Remember, contract law is party defined law. So define the law that you want. Real estate agents' jobs in lease negotiations is to spark conversation, to encourage ideas and to help find a meeting of the minds. Good luck and stay cool, its hot out there.

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