In general, the many guarantor protections provided by common law and statutes can be waived. Often, in fact, well-drafted guarantee agreements contain a half-page description of the guaranteed obligations and then go on for several pages of waivers of guarantor protections.

Of course, not all guarantees are well-drafted, particularly when the nature of the transaction doesn't alert the parties and their counsel to the fact that a guarantee relationship has been created. For instance, if two parties co-sign a note, where only one of them is actually receiving the loan proceeds and the other is signing to provide credit enhancement, the credit-enhancer is really a guarantor.

Some typical real estate transactional documents, such as environmental indemnities, are sometimes drafted in ways that give the parent-guarantor an argument that it is actually a guarantor of the borrower's environmental obligations. Guarantees inserted into documents like purchase agreements and joint venture agreements often neglect to add the pages of waivers of guarantor protections found in loan guarantees.

Even where recipients of guarantees include a broad set of waivers, subsequent workout negotiations can be hindered by the need to obtain guarantor consent to deal modifications or risk releasing the guarantor.

In some contexts, the effect of these various guarantor protections is to cause lenders to assume that guarantors are actually not worth pursuing. In their underwriting, they take guarantees from controlling entities primarily in order to incentivize them to cause the borrower to behave, particularly by not filing for bankruptcy, which can cause a non-recourse loan to become full recourse to the guarantor.

In fact, though, guarantees do work and are enforceable, as long as they are thoughtfully drafted and the holder of the guaranty proceeds very carefully when modifying or enforcing the guaranteed obligations.

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According to Tom Muller, co-chair of the land use and real estate group at Manatt, Phelps & Phillips LLP, guarantee agreements are an important component of many real estate transactions, ranging from loans to partnership agreements to post-closing obligations under purchase agreements. But do they really work? Historically, he says, the law has viewed guarantees with some skepticism. “Why would you agree to be responsible for the obligations of someone else? Thus, guarantees fall into a very short list of types of contracts that must be in writing in order to be enforceable.” In the exclusive commentary below, Muller takes a closer look at the subject.

The views expressed below are the author's own.

Both the common law (law derived from court cases) and legislation provide many outs for guarantors. For instance, the lender must first pursue the borrower before going after the guarantor, or the guarantor may be released from the guaranty. If the borrower and lender modify the guaranteed loan in a way that the guarantor can argue will increase the likelihood of a call on the guarantee, then the guarantor may be released from the guaranty.

A similar principle provides that a guarantor who pays a claim on the guaranty is entitled to step into the shoes of the lender against the borrower and attempt to recover the amounts paid on the guaranty, and therefore anything a lender does to limit or destroy its remedies against the borrower can be used by the guarantor to defend against a claim on the guaranty.

In general, the many guarantor protections provided by common law and statutes can be waived. Often, in fact, well-drafted guarantee agreements contain a half-page description of the guaranteed obligations and then go on for several pages of waivers of guarantor protections.

Of course, not all guarantees are well-drafted, particularly when the nature of the transaction doesn't alert the parties and their counsel to the fact that a guarantee relationship has been created. For instance, if two parties co-sign a note, where only one of them is actually receiving the loan proceeds and the other is signing to provide credit enhancement, the credit-enhancer is really a guarantor.

Some typical real estate transactional documents, such as environmental indemnities, are sometimes drafted in ways that give the parent-guarantor an argument that it is actually a guarantor of the borrower's environmental obligations. Guarantees inserted into documents like purchase agreements and joint venture agreements often neglect to add the pages of waivers of guarantor protections found in loan guarantees.

Even where recipients of guarantees include a broad set of waivers, subsequent workout negotiations can be hindered by the need to obtain guarantor consent to deal modifications or risk releasing the guarantor.

In some contexts, the effect of these various guarantor protections is to cause lenders to assume that guarantors are actually not worth pursuing. In their underwriting, they take guarantees from controlling entities primarily in order to incentivize them to cause the borrower to behave, particularly by not filing for bankruptcy, which can cause a non-recourse loan to become full recourse to the guarantor.

In fact, though, guarantees do work and are enforceable, as long as they are thoughtfully drafted and the holder of the guaranty proceeds very carefully when modifying or enforcing the guaranteed obligations.