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Stupid (California) Guaranty Tricks

Often, guaranties are written a little too quickly, or are a little too clever, and as a result they might not meet the lender's goals -- especially in California.

By Maura O'Connor | Updated on July 06, 2011

It’s interesting how badly guaranties can get screwed up in California commercial real estate loans.  You wouldn’t think it would be that hard:  the basic idea of a guaranty is fairly simple, and, after all, lots of loan documents started with forms written by reasonably competent lawyers.  Piece of cake, right?  Unfortunately, no:  in fact, when reviewing loan papers I almost always check the guarantees first.  The California case law on guarantees is a snake pit, and has been for many years:  it seems the courts just don’t like them, and set up all sorts of tricks and defenses.  Also, for some reason, guarantees seem to bring out the “clever” side of would-be creative drafters.  Often, they’re a little too clever, and the instrument might not be enforceable or, even if technically enforceable, may not meet the lender’s goals.

The bottom line concept of guaranties is not complex: a person or entity who is not the borrower, but has some interest in the borrower’s success, can guarantee a loan to the borrower.  The guarantor will have to pay the loan if the borrower doesn’t.  The guarantor then will have a “subrogation” right: the right to go after the borrower itself for reimbursement.  (Unfortunately, that right often is worthless – if the borrower cannot pay the lender, it usually cannot pay the guarantor either.)

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