5 Things You Should Know Before Signing A Personal Guarantee
Often times, the principal of an entity is asked to execute a personal guarantee as part of a transaction with its bank, landlord or lender. The personal guarantee is then used to intimidate or otherwise force the principal to repay the guaranteed debt over other debts. Before executing a personal guarantee or succumbing to the pressure caused by one, you should consider the following:
The laws which will enforce the personal guarantee should be specified in the guarantee itself. While a guarantee might be executed in one location, a simple contractual provision could make it enforceable in another.
Who can enforce the guarantee?
Under California law, a personal guarantee can only be enforced by the specific party who was given the guarantee. In other words, only the original signing parties to the contract can enforce the personal guarantee. If a party assigns its interest to another party, the personal guarantee is no longer enforceable. Keep this in mind when a bank sells your loan to another lender or when one lender goes out of business and is thereafter taken over by another.
What exactly did you guarantee?
In California, a personal guarantee is only enforceable with regard to the original contractual terms. When the terms of a contract have been changed in a material way, the personal guarantee may no longer be enforceable.
Is there a cure period?
The party enforcing a personal guarantee must allow the guarantor to subrogate or else the personal guarantee is rendered unenforceable under California Law. In other words, the party enforcing the personal guarantee must provide the guarantor the opportunity to step into the shoes of the defaulting party, thereby allowing the guarantor to satisfy any obligation owed to the enforcing party.
The terms of your guarantee are controlling
Many of the enforceability requirements listed above can be contracted away. Pursuant to the outcome of Union Bank v. Gradsky, it is legal for a lender, bank, or landlord to utilize a personal guarantee which includes language waiving each of the enforceability requirements provided above. As a result, courts routinely enforce personal guarantees.
In most situations, clients bring personal guarantees to an attorney for review after being served with a lawsuit enforcing the terms of the personal guarantee. Instead, Afsar Law Group recommends that you be proactive. Have a licensed attorney review all contracts and personal guarantees before you sign them.
Amir H. Afsar, Esq. is an attorney and founder of Afsar Law Group, A.P.C. which represents clients in business, real estate, construction, and estate planning matters throughout California and the Coachella Valley including Indio, La Quinta, Bermuda Dunes, Indian Wells, Palm Desert, Rancho Mirage, Cathedral City, Palm Springs, Banning, Joshua Tree, and other cities located within Riverside and San Bernardino County. Mr. Afsar can be reached at Afsar Law Group, A.P.C. at 760.345.3110.
"Mr. Afsar spent the time explaining my options and what effect they would have. He was very experienced in his advice and very easy to understand."Shelly, May 2011
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