Personal Guaranties: Don't Overestimate the Simplicity of this Instrument

Commercial lenders and landlords are more often looking to borrowers and tenants to sign personal guaranties. A personal guaranty is a legal and binding promise to pay the debt of another person or entity should that person or entity default on the primary obligation. In other words, the individual who signs the personal guaranty will be liable for the debt and payments obligations as if he or she signed the promissory note or lease him/herself.  If you are considering signing a personal guaranty, you should consult one of our Lynnfield corporate attorneys or real estate attorneys to advise you on the various risks and benefits associated with the guaranty.

Guaranties are typically not included in a promissory note or lease agreement itself. Guaranties are contained in separate documents, as notes and leases alone are typically insufficient to create a binding obligation. There are numerous valid defenses to guaranties, which means that if you ever have to enforce a guaranty by commencing litigation against a guarantor, a skilled attorney will be able to uncover flaws that support legal defenses to the guaranty. This means that if the guaranty is not properly (and near perfectly) drafted, then a guarantor may have the opportunity to demonstrate that the guaranty is unenforcable and avoid payment of the debt. If you have questions and concerns about drafting or reviewing a guaranty for enforcability, please contact one of our business - corporate attorneys for a free consultation in Boston or at our Lynnfield office.

Just like mortgages and security agreements (that secure personal property) a personal guaranty serves as collateral so as to secure a loan. Here, the collateral is a promise by a third party to repay the debt should the primary debt obligor default on the promissory note. A personal guaranty drafted by an experienced Massachusetts corporate lawyer can provide strong protection for the financial interests of a lender. However, the viability of a personal guaranty depends on the financial condition and asset holdings of the guarantor. If, for example, the guarantor becomes insolvent or has no assets to satisfy a potential judgment on the promissory note then then collection on the guaranty becomes unrealistic and a lender will end up spending legal fees on a debt that will never be repaid. Therefore, it is important for a lender to perform due diligence on any guarantor prior to entering into this type of contract. 

In Massachusetts Courts, the enforcement of personal guaranties is a common theme of lawsuits on promissory notes. The guaranties are almost always contested by any guarantor with something to lose. Therefore, a pre-printed or template form will cause the lender and note holder to assume a substantial amount of risk that the guaranty will be found unenforcable. If you have questions abut personal guaranties for any loan transaction, please contact one of our business lawyers who advise clients in Eastern Massachusetts on these types of transactions.  NORTHSHORE LEGAL may be reached for a free consultation at 781-463-6063.