What is a Personal Guarantee?
Personal Guarantees in real estate are hitting the news at the moment because of a new law in New York City. Though that won’t impact all Long Island real estate owners, it’s worth taking a look at how they work.
A personal guarantee is basically a clause on a contract that pledges private assets to secure a mortgage or a lease. When it’s done on a lease, people tend to place them in separate contracts known as guaranties. It allows a guarantor to take full liability for tenant payments.
So if the tenant is a local store, then the store’s owner could become the guarantor. It basically tells landlords they’ll get paid if the store goes out of business. This is outside the norm since normally no individual owes any debts when a business goes out of business. Once the business goes out of business nobody tends to pay.
In a tight real estate market this is a risk for leaseholders. They mitigate that risk by making sure someone is personally responsible for the lease.
Will the New York CIty law hold water? Many experts say no. The fact that these guaranties usually exist as separate entities means that the city might not be able to enforce the provision.
That said, the same experts say landlords might not want to pursue them. “From a practical perspective I don’t know if you want to go in front of a judge in this current environment filing an action against the guarantor because you couldn’t go after the tenant because of the moratorium. If you are litigating you want to come across as the good guy and you definitely don’t want to be seen pushing a case against, for example, a restaurant that is hurting from a shutdown.”
Is this a good idea for your leases? Maybe. It’s worth consulting with your real estate attorney before choosing to make guaranties part of your legal strategy. Demanding new guaranties may indeed be more complicated in today’s environment than one might initially imagine.
For many landlords, it might be better to focus on finding new tenants instead of suing old ones who can no longer remain in business because the Covid-19 pandemic has catapulted us a terrible economic crisis. Creating more barriers to entry might not get your properties leased any faster.
Got questions about your unique situation? Contact The Law Office of Sami Perez to get started.