Many commercial real estate loans are “non-recourse,” which means in general terms that foreclosing on the real estate securing the loan is the lender’s sole remedy for a borrower’s failure to repay the loan. The lender is generally prohibited from suing the borrower entity or any individual guarantors to recover the unpaid debt or any deficiency remaining after foreclosure.
However, there certain types of defaults and circumstances for which the borrower and, in most cases, individual guarantors could be liable, despite the non-recourse nature of the loan. In the interest of facilitating the deal and closing of the loan, guarantors too often undertake unreasonable obligations, which can be substantially mitigated by incorporating measured, but effective, qualifications and limitations into the guaranty of recourse obligations (the “Guaranty”) and environmental indemnity. The main objective of the guarantor’s counsel in negotiating the Guaranty and environmental indemnity is to limit the guaranteed obligations and deliverables of guarantors. Limiting the guarantors’ responsibilities should begin with the representations and warranties made by guarantors. There should be minimal overlap thereof with representations and warranties made by the borrower, since a breach would be recoverable against the borrower and the lender already has a means of recovery. Any property-related representations should be limited to the actual knowledge of the guarantor, without independent duty to verify or inspect. The guarantor’s obligation to deliver financial statements should be limited as much as possible, so as to avoid the risk of any administrative default for failure to deliver. With respect to delivery of financial statements, guarantors should insist that the lender accept a personal certification, rather than audited financial statements. Depending on the size of the loan, guarantors may be able to negotiate that such deliverables only be required during ongoing events of default. If the lender is unwilling to agree, then counsel should ensure that the guarantors are not required to deliver financial statements more than once annually, and upon lender’s reasonable demand during the continuance of an event of default. A guarantor should also try to reduce the amount of any penalty for failure to timely deliver financial reports.
While the desire of guarantors to help “close the deal” may obscure the importance of such concerns, guarantors should (i) be wary of being too accommodating and (ii) engage independent counsel to best protect their interests, while striking the proper balance with the commercial realities of the transaction.