A personal guarantee is a written promise by an individual or affiliated entity to repay a commercial real estate loan if the borrower does not. In practice, it sits alongside the collateral rather than inside it. Common forms include payment guarantees that let a lender proceed directly against the guarantor, collection guarantees that require lenders to pursue the borrower first, limited guarantees with negotiated caps or burn-offs, and nonrecourse carve-out guarantees that cover specified bad acts with potential full recourse on defined triggers.
Guarantees exist to tighten outcomes where asset quality, cash flow stability, or sponsor execution raise questions. They supplement mortgages and equity pledges rather than replace them. You can think of a guarantee as an extra seatbelt when the road looks bumpy, particularly for transitional assets, mid-market deals, and asset-light operating platforms.
What each side wants from a guarantee
Lenders seek faster recovery and better discipline, especially in workouts or special servicing. They favor clear bad-act coverage, enforceable waivers, and direct paths to cash if a project veers off plan. Sponsors want loss-only obligations with sensible caps or burn-offs tied to deleveraging, construction, or leasing milestones. They also push to limit full recourse triggers to deliberate acts they control. Borrowers need bright lines around prohibited acts and practical cure rights so a technical misstep does not become a personal balance sheet event.
In commercial real estate, carve-out or bad-boy guarantees typically cover fraud, misapplication of rents, voluntary waste, prohibited transfers, and environmental liabilities. Some forms add springing full recourse for unauthorized bankruptcy filings, transfer violations, or prohibited debt. Many deals keep environmental indemnities in a separate document to avoid mixing long-tail environmental risk with loan recourse mechanics and to target insurance recovery.
Jurisdictions and legal must-knows
In the United States, the Statute of Frauds applies. Guarantees should be in writing and signed by the guarantor. New York law is a common default for predictability and enforcement of waivers, often via New York General Obligations Law §5-1401 for agreements above $250,000. In California, include explicit waivers of suretyship defenses aligned to California Civil Code §2856, and make those waivers conspicuous and specific.
Anti-deficiency rules interact with guarantees in some states. In California, nonjudicial foreclosure can impair a guarantor’s subrogation and contribution rights. The Gradsky line of cases led to statutory waiver practices codified in §2856. Avoid sham-guaranty issues by keeping borrower and guarantor genuinely separate and ensuring the borrower receives a real benefit. Michigan’s Nonrecourse Mortgage Loan Act is a cautionary drafting reminder: do not convert a nonrecourse loan into full recourse with broad insolvency or net-worth covenants.
In the UK, guarantees are typically executed as deeds for consideration and limitation purposes. Distinguish a guarantee, which is a secondary obligation, from an indemnity, which is a primary obligation. Well-drafted forms include both so the obligation survives variations to the underlying facility. The Holme v. Brunskill principle still applies, meaning material changes to borrower obligations without guarantor consent can discharge the guarantee unless the document preserves liability for amendments.
Cross-border guarantees add complexity around currency, enforcement, and tax. Pair choice-of-law with jurisdiction and service-of-process mechanics. Get local counsel on judgment recognition and formalities like deeds, notarization, and legalization. In many civil law jurisdictions, financial assistance rules, corporate benefit tests, and thin-cap limits can constrain property special-purpose vehicle guarantees. Lenders often reach for a holdco or sponsor guarantee where corporate benefit is easier to support. If the lending structure uses a property SPV, confirm local requirements early.
Enforcement that actually works
A guarantee is a separate obligation. Payment guarantees allow the lender to sue the guarantor after acceleration. Collection guarantees require the lender to first exhaust borrower remedies. Carve-out guarantees operate as indemnities for defined losses, with separate sections for triggers that spring to full recourse.
Collateral interplay matters. Many lenders pair guarantees with equity pledges of the property SPE to speed control transfers. Intercreditor agreements should state when mezzanine lenders or preferred equity investors can act on their guarantees or collateral. Environmental indemnities often run from both borrower and guarantor and survive beyond maturity. For a deeper dive on lender environmental exposure and why indemnities get special treatment, see this guide to lender environmental liability.
Notice and cure provisions are practical pressure valves. Sponsors negotiate short cure windows for technical breaches like SPE formalities, minor transfer errors, or reporting lapses. Lenders keep no-cure positions for bankruptcy filings and fraud. A two- to five-day cure for inadvertent breaches that do not prejudice collateral often keeps both sides out of court.
Documents and a sequence that reduces friction
Guarantee-related documentation is modular but interconnected. Core documents typically include the guaranty agreement, a recourse carve-out guaranty, an environmental indemnity, the loan agreement and mortgage or deed of trust, any equity pledge or security agreements, intercreditor or subordination agreements, and periodic financial statements and tax returns from the guarantor. In some jurisdictions, spousal consents or homestead waivers are also required.
Sequence matters. Lock recourse definitions in the loan agreement before finalizing the guaranty. Conform waivers to governing law. Run lien, judgment, and litigation searches on the guarantor. Confirm authority and capacity for trusts and partnerships. If the lender uses a deed of trust, align terminology and filing practice with local law. If you are comparing ownership paths, consider the trade-offs in SPV vs personal name structures.
Economics, caps, and a quick case study
Most sponsor guarantees in CRE carry no explicit fee, though some sponsor platforms charge an internal fee to compensate the guarantor, which carries tax and transfer pricing implications. Third-party guarantors charge bespoke fees priced to term, cap, and credit profile.
Caps and burn-offs align risk with execution. Caps can be fixed dollar amounts, a percentage of the outstanding balance, or tied to lender loss. Burn-offs commonly step down after certificate of occupancy, stabilization, or hitting loan-to-value thresholds. Avoid formulations that recreate the cap per occurrence unless an aggregate cap sits on top.
Case study: a $50 million nonrecourse loan includes a carve-out guaranty capped to losses from rent diversion and a springing full recourse trigger for unauthorized voluntary bankruptcy. If no bad act occurs, guarantor exposure is zero. If $2 million of rents are diverted, the guarantor covers that loss plus enforcement costs. If the borrower files an unauthorized voluntary bankruptcy and the trigger springs to full recourse, the guarantor could be liable for the unpaid debt.
Accounting and reporting treatment
Under US GAAP, ASC 460 typically requires the guarantor to recognize a liability at fair value at inception and to disclose the key terms. Related-party guarantees often record a nominal amount and reassess as circumstances evolve. Subsequent measurement depends on whether the guarantee is a contingent liability under ASC 450 or a stand-ready obligation under ASC 460. Consolidation may be triggered under ASC 810 if the guarantee absorbs losses or receives benefits and is paired with decision-making rights.
Under IFRS, financial guarantee contracts are initially measured at fair value, then carried at the higher of the IFRS 9 loss allowance and the amount initially recognized less amortization. Issuers record expected credit losses and update staging with deterioration in the underlying exposure. IFRS 10 follows a power-and-returns test similar to ASC 810 for consolidation.
Lenders do not book guarantees as separate assets. Instead, guarantees reduce expected loss under CECL or IFRS 9 and can lower risk-weighted assets if the guarantor and documentation meet eligibility tests for credit risk mitigation.
Tax, solvency, and avoidable traps
Corporate guarantors generally treat guarantee fees as ordinary income. Borrowers may deduct fees if arm’s length and tied to the financing, subject to capitalization rules. For related parties, document benefit, method, and proportionality consistent with OECD guidance. Cross-border fee streams may be recharacterized as interest or services, triggering withholding tax and transfer pricing complexities.
Voidable transfer challenges arise when guarantees are granted without reasonably equivalent value while insolvent or when they create insolvency. Solve with solvency certificates, board resolutions documenting corporate benefit, and avoiding last-minute increases near the zone of insolvency. Where property is secured via a deed of trust, align any personal guarantee analysis with local rules and filing practice. For a plain-English refresher, see this overview of a deed of trust.
Compliance expectations
Apply KYC and AML standards to guarantors. Gather beneficial ownership information consistent with the US Corporate Transparency Act. Screen for sanctions and politically exposed person flags, especially for non-US residents. Bank supervisors expect a written view on guarantor capacity, support likelihood, and enforceability, with periodic updates. If the guarantor is an individual, align with any jurisdiction-specific disclosures, execution rules, homestead exemptions, and spousal joinders.
Risks and governance that keep you out of court
- Overbroad triggers: Keep full recourse for sponsor-controlled acts like unauthorized filings or transfers, not for economic outcomes or stylized insolvency covenants.
- Loss measures: For loss-only carve-outs, define recoverable categories such as legal fees and special servicer fees, and prefer actual out-of-pocket measures where expected.
- Circular credit: Do not rely on a guarantor funded solely by the borrower or without separateness. Require independent assets and ring-fenced liquidity.
- Enforcement friction: Solve upfront with asset location representations, consent to jurisdiction, and forum waivers.
- Servicer mechanics: In securitized loans, specify enforcement lanes, notice, and consent under intercreditor agreements.
A simple rule of thumb applies: if you would not lend to the guarantor on a handshake, do not lean on their signature.
Alternatives and when they win
- Cash collateral: Offers immediate enhancement but creates cash drag. Best for short-dated or narrow risks.
- Standby letter of credit: Shifts risk to a bank. Draws are documentary and pricing reflects undrawn fees and bank capacity.
- Surety bond: Insurer underwrites, but indemnities often loop back to principals.
- Keepwell: Commits support to maintain solvency or liquidity. Optics may be better in some places, but enforcement is typically weaker than a guarantee.
- Equity cure: Solves financial covenant breaches without personal recourse. Timing and sponsor liquidity drive success. For context on coverage math, see this guide to debt service coverage ratio.
A 30-minute stress test for guarantor capacity
To add rigor without analysis paralysis, run this quick policy-driven check before you price a guarantee. First, aggregate unrestricted cash, marketable securities, and undrawn committed bank lines net of minimum balances. Second, haircut assets by transferability and jurisdiction enforceability to reflect judgment-collection friction. Third, map the liens and competing guarantees that may prime you. Fourth, test whether post-haircut liquidity covers the cap, plus 6 to 12 months of carrying costs if enforcement stalls. Finally, require a path to cash within 90 days based on asset location and legal tools. If the numbers do not clear this hurdle, resize the cap, add collateral, or switch to cash-backed credit enhancement.
Implementation timeline you can reuse
- Term sheet: State guarantee type, cap or triggers, burn-offs, and governing law.
- Diligence: Collect guarantor financials and tax returns. Run lien, judgment, and bankruptcy searches.
- Drafting: Align loan recourse definitions, guaranty, environmental indemnity, and intercreditors. Tailor waivers to governing law.
- Approvals: Credit committee validates reliance on the guarantor and the monitoring plan. Sponsor boards record corporate benefit.
- Closing: Execute, obtain any spousal consents, notarize where required, and deliver solvency and authority certificates.
- Monitoring: Update guarantor financials, track burn-off milestones, and test capacity after major events.
Kill tests for quick no-go decisions
For lenders
- Thin coverage: Net worth and liquidity fail to support the cap after exemptions.
- Hard-to-reach assets: Assets sit in jurisdictions where judgments do not travel well, without alternate support.
- Missing formalities: Required waivers or spousal consents are absent.
- Corporate benefit risk: Corporate guarantor lacks documented benefit or sits near thin-cap limits.
- Weak carve-outs: Sponsor resists clear carve-outs for fraud, rent diversion, and prohibited transfers.
For sponsors
- Economic full recourse: Full recourse tied to financial covenants, SPE status, or catch-all material adverse change language.
- Open-ended losses: Loss-only indemnity with broad categories or consequential damages.
- No cure: No cure rights for administrative or immaterial breaches.
- Blocked reimbursement: Intercreditor terms that prevent contribution or reimbursement.
Drafting terms that move the needle
- Scope and cap: State a hard cap for limited guarantees and whether fees and costs sit inside it. Use aggregate caps.
- Waivers: Include suretyship waivers, marshaling, impairment of collateral, and presentment and demand. Track California §2856. In the UK, preserve liability through amendments.
- Bankruptcy triggers: Limit full recourse to voluntary filings by the borrower, collusive involuntary filings, and intentional breaches of bankruptcy-remote covenants.
- Reporting and access: Require periodic financials, tax returns, and asset schedules. Tie burn-off to verifiable certifications.
- Duration and release: Release at repayment, takeout, or defined milestones, with step-downs for construction and lease-up phases.
- Enforcement and forum: Consent to jurisdiction, venue, and service. Include jury trial waivers where enforceable.
Operational protections that pay off later
- Asset mapping: Schedule guarantor assets, liens, and exemptions at closing. Refresh annually and require notice of material transfers or liens.
- Environmental backstops: Align environmental indemnities with insurance and require evidence of tail coverage where relevant.
- Intercreditor alignment: Ensure senior lender consent is not unreasonably withheld for actions that prevent recourse triggers. Coordinate mezzanine and preferred equity guarantees. Consider local norms if the borrowing entity is a property SPV formed for the deal, including Company House formalities for UK SPVs as outlined here: Property SPV at Companies House.
What is not a guarantee
- Comfort letters: Keepwells or comfort letters without payment obligations are not guarantees.
- Narrow support: Sponsor support limited to fees or operating deficits covers less and should be priced accordingly.
- Pure carve-outs: Loss-only bad-boy indemnities are not payment guarantees unless paired with springing full recourse language.
Practical enforcement and settlement patterns
Effective demand letters tie defaults to documents, state amounts or categories of loss, and reserve rights. For loss-only carve-outs, calculate and attach support. For full recourse triggers, map facts to triggers with exhibits. In sale-driven workouts, guarantors often trade cooperation like turnover of rents and smooth receiver transition for capped exposure. In litigation, speed depends on asset location and prejudgment remedies. Mapping exemptions and available attachments before filing can shorten timelines.
Sponsor governance that avoids triggers
Centralize decisions that could trigger recourse, including filings, transfers, new debt, and cash controls. Train property managers on rent handling and reporting. Keep a clean paper trail with board approvals, solvency certificates, and memos documenting corporate benefit for increases or amendments. For multiple guarantors, align contribution agreements to ownership and control so internal disputes do not stall resolution.
Records and clean closeout
Maintain a complete archive of guaranty drafts, versions, notices, Q&A, user access logs, and enforcement milestones. Index it and maintain immutable hashes for integrity checks. Apply a written retention schedule. On vendor systems, require deletion followed by a destruction certificate. Legal holds override deletion until release. At payoff, confirm formal releases and deliver recorded terminations to avoid surprises at refinance or sale.
Key Takeaway
Personal guarantees in landlord lending are about behavior and recovery. Lenders should demand clear bad-act coverage, targeted full recourse triggers, and verifiable guarantor capacity. Sponsors should insist on precision, caps or burn-offs linked to execution, and sensible cures for technical slips. Underwrite the legal and practical path to cash, not just the clause on the page.