In today’s Freedom Friday blog and email newsletter, I want to talk about an issue that comes up in contracts that I am either asked to draft or review on behalf of my clients, and that’s a personal guaranty. Just a few days ago, a client asked me to review a contract and look for anything that would create personal liability; the client was concerned with possible veil-piercing (that’s a question for a different day). One of the things I looked for in that contract (and it wasn’t there) was a personal guaranty. In today’s Freedom Friday blog and email newsletter, I’m answering the question, “What is a personal guaranty?”
First, the term “guaranty” has an alternative spelling, which is “guarantee,” which is a similar term. In general, a “guarantee” is more of a verb, and a “guaranty” is more of a noun. Specifically, a “guaranty” a written agreement that one party will pay the money required if another party fails to do so. A “personal guaranty” is when an individual person makes such a promise if an LLC or other business entity fails to pay money to another party, such as a lender or a landlord. Often when an LLC or other business entity desires to enter into a business loan or a commercial lease, the owner of the business (the individual who owns the LLC or is the managing member) is required to sign a personal guaranty, pledging that he or she will personally be responsible for the debt or the obligation if somehow the LLC or other business entity fails to take care of it.
There are several advantages to a lender, creditor, or landlord requiring a personal guaranty as part of a business loan or commercial lease. In a breach of contract case, a personal guaranty can help ensure recovery and veil-piercing will not be necessary (you can sue both the LLC and the individual who signed the personal guaranty if there is a default on the loan or obligation).
With regards to contract drafting, there are several key elements to creating an effective personal guaranty. First, clearly identify the guarantor. The guarantor must use his or her full legal name and one should have the signature notarized to avoid claims of forgery, fraud, or other misunderstandings. Also, the guaranty language should clearly define the obligations which are guaranteed (e.g., payment on the note, base rent in a commercial lease, etc.). The guarantor should also waive certain defenses, including a requirement that the creditor first pursue the borrower on the note, and that the guaranty survives and remains in effect, even if the borrower’s business structure changes, etc.
Thinking about starting a small business? Or maybe your small business is having issues with contracts, leases, business partners, collection issues, or experiencing other barriers to growth? Please contact me at Jonathan@libertylegalok.com to schedule a FREE strategy session.