Header graphic for print
Tilting the Scales Business Issues with a Legal Slant

Personal Guaranties: What? Me Worry?

Posted in Property Issues

Franklin, a Senior at Fraternal State, is finally moving off campus to his own apartment with four of his buddies. Before Owen Ohner, the landlord, will approve their lease, he requires a personal guaranty from all the parents. The landlord’s rep Lyn Lackey assures Franklin’s Dad Milton Munney that the guaranty is “standard.” Could this be a problem for Milton?

Yes. The “standard” guaranty that Milton signs almost certainly guarantees his unconditional and absolute payment of the entire debt – whether Franklin’s frat friends and their parents pay or not. Worse yet, a “standard” guaranty waives all tenant defenses or rights of offset against the landlord, meaning Milton would have to pay in full and separately get reimbursement from the other parents. And, if Franklin has any claims against Ohner, they are not offset against Milton’s guaranty. Franklin must sue Ohner separately and then collect his judgment, without any right of offset landlord’s claims under the lease.

Separate Obligations

Under Texas law, the Guaranty and the Lease Agreement are separate undertakings. One who guaranties payment and waives the requirement that the holder of the note exhaust its rights against the maker, (1) becomes an absolute guarantor, (2) is primarily liable, and (3) waives all defenses and any requirement that the landlord first act against the lessees, or, in this case, any other guarantor. As a general rule, an absolute guaranty imposes liability on the guarantor even if the underlying obligation cannot be enforced against the principal.

Because Milton waived all affirmative defenses, he is liable on the guaranty even if the lease is unenforceable against his buddies because of some alleged breach.

Tilting the Scales in Your Favor

A personal guaranty is not likely to be avoided. Milton is better off co-signing the lease as a tenant than as a guarantor. A second option would be to modify the guaranty so that Milton is responsible only for Franklin’s twenty percent share of the lease – which is not likely. If all else fails, at least plan to meet with the parents of Franklin’s friends and talk about their views of the lease and the relative responsibilities of each. Good luck.