Building Owners and Managers Association

Improving the Performance of the Commercial Real Estate Industry
A Guaranteed Problem
Do You Really Know Your Guarantor?
Thursday, January 7, 2016
by: Richard L. Seide, Esq. and Ellen L. Ticknor. BOMA Orange County Members

Section: Association Business

The Scenario
The landlord has negotiated a lease with a tenant company that is viable, but not as strong financially as the landlord requires.  The landlord requires that the lease be guaranteed by an individual with a strong financial position and substantial assets.  The proposed tenant’s representative provides financials on the proposed guarantor.  The landlord reviews the financials, runs credit and deems the guarantor financially viable and acceptable.  The landlord  prepares a lease and a guaranty.  The documents are either given to the tenant contact or given to the landlord’s broker to be transmitted to the tenant or their  broker.  The lease and guaranty are signed and returned to the landlord.  No one ever meets the guarantor.
The Rent Falls Behind
All is well for the first year of the 5-year lease.  In year two or three, rent payments start to become sporadic.  Eventually, the tenant company is either evicted or abandons the space.  The landlord retains counsel to file a lawsuit against the tenant and the guarantor for the past due rent and the future rent that will become due under the lease.  The tenant company is having substantial financial problems and is on its way out so it does NOT retain counsel to defend itself. It appears initially that the case may proceed by default, but . . . . 
The Issue - There is Always an Issue . . .
The lease guarantor retains counsel after being served.  We are advised that (a) the signature on the guaranty is not his or her signature; (b) that he or she did not give anyone permission to use the financials or sign his or her name to the guaranty; (c) that it was never his or her intention to financially back the tenant company; and (d) he or she had no knowledge a guaranty had been signed and he or she was not involved in the tenant business.
After we investigate the facts more fully during the course of the lawsuit, we find out that the guarantor was the uncle, sister, ex-wife, ex-friend, former employer, etc. of the tenant contact.  Pick any scenario and we’ve seen it!   In fact, the guarantor did not sign the guaranty.  The tenant contact  either had access to financial information or  surreptitiously obtained enough identifying information (i.e. date of birth and social) and some financial information (just open the mail) to submit an application and then put the person’s signature (forgery) on the guaranty. 
After the guarantor’s attorney submits enough information to back up his or her client’s position, and when the signature on the guarantor’s license, passport, etc. bears no resemblance to the signature on the guaranty, we realize we have a significant problem.  We then go back to the client (and broker) to see if anyone met  the guarantor in person and confirmed identity.  If the facts play out as set forth above, we dismiss the guarantor from the lawsuit.  The landlord now has a major problem: a former tenant with NO assets and a guarantor who did not sign the guaranty.  The landlord can expect to recover nothing in the lawsuit.

We have seen this scenario (and assorted versions of it) play out numerous times  over the past few years.  Stolen identities and forged guaranties, while not common, are certainly no longer  rare.  Identity theft is one of the fastest growing  white-collar crimes in our country.  In tough economic times, landlords are understandably eager to lease space that has been vacant for a considerable period of time  and may jump at what appears to be solid backing for a weak tenant.   On the other hand, “weak” tenants, in the interest of getting the space they want, may get “more creative” when submitting financial documentation and signatures. If you are dealing  long distance or through broker intermediaries, this problem may be compounded.
The Solution - Be Proactive and Interactive
Actually, there are two fairly simple solutions, both of which will prevent this issue:
(a) Make sure a representative from the landlord’s side meets the guarantor and is present whenever a guaranty is signed.  Obtain proof of identity (i.e. driver’s license or passport) and put a photocopy in your file; OR
(b) Have the guarantor’s signature on the guaranty notarized.
Either of the foregoing ensures that there is evidentiary support for the landlord’s claim against the guarantor if litigation becomes necessary down the road. 
These suggestions may appear  simplistic and some may think that the precautions are overkill.  However, if you are ever a Plaintiff in a lawsuit where the “phantom guarantor” is raised as a defense, you’ll be very pleased  you took the precaution and confirmed that the person signing the guaranty was, in fact, the person you accepted as your lease guarantor.  An ounce of prevention is, indeed, worth a pound of cure.
Last, but Not Least . . .  
The purpose of the guaranty is to have someone to go after if the tenant company fails.  In order for the guaranty to provide the protection you are looking for, we have to be able to actually find the guarantor and then find and levy upon the assets of the guarantor.  This means we need the complete name and address of the guarantor and his or her date of birth, social and residence address.  The financials you obtain from the guarantor must be SPECIFIC.  What is the asset and where is it located?  Real estate owned should include complete addresses.  Bank accounts should include name and  address of the institution and complete account numbers.  When it comes to this type of information, More is Always Better!       

Any information contained herein is intended for informational purposes only and should not be construed as legal advice. Seek competent counsel for advice on any legal matter. 
Richard L. Seide, APC
901 Dove Street, Suite 120
Newport Beach, CA 92660-3018
(949) 474-8000
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