September 14, 2006

Ask The Lawyer

Couple wary of landlord’s request to sign personal guaranty

This week's question:
I recently formed my own corporation to begin a new business. I have in mind to rent some office space in an office building with my new corporation shown as the tenant on the lease. The landlord wants my wife and me to sign a personal guaranty of the lease. We have our doubts as to whether this is a good idea. Does the landlord have the right to require us to sign a personal guaranty? Do we have any other options? Are our personal assets at risk?

Tom T.
Almaden Valley

Dear Tom:
You are smart to explore these questions before you and your wife sign the personal guaranty, Tom. Otherwise, you may be in for some rather disturbing surprises later on.

A personal guaranty generally means just that—you are guaranteeing the obligation of another person (natural or corporate). In this case, you would be standing behind the obligation of your new corporation for the duration of the lease. Of course, your personal assets would be at risk. Whether you want to do that is up to you.

A March, 2005, case illustrates just how a personal guaranty can be applied. The case arose in Alameda County and is entitled Central Building, LLC, v. Don D. Cooper, et al. 127 Cal.App.4th 1053. In that case, Don, Ben, and Robert guaranteed the rent obligation of C&C Corporation.

Unfortunately, the corporation did not pay the rent at its business premises as agreed. The case went to court and the trial court found for the landlord to the tune of $291,964.76 in unpaid rent, fees, and costs. Judgment was entered in favor of the landlord and against the corporation C&C as well as the personal guarantors, Don, Ben, and Robert.

The Court of Appeal affirmed the trial court in finding liability on the personal guarantees. The Court said that California Civil Code §2787 provides in relevant part: "A surety or guarantor is one who promises to answer for the debt, default, or miscarriage of another, or hypothecates [sets aside] property as security therefor."

The Court of Appeal also said that when a party undertakes to guaranty the faithful performance of another contract, the guarantor is contracting in reference to the other contract, otherwise it would not know what obligation it was assuming.

In the words of the Court: "Guaranty agreements may be limited or continuing. A guaranty relating to a future liability of the principal, under successive transactions, which either continue his liability or from time to time renew it after it has been satisfied, is called a continuing guaranty", citing California Civil Code §2814.

Also, the Court stated that a continuing guaranty is a contract pursuant to which a person agrees to be a secondary obligor for all future obligations of the principal obligor to the obligee. The guaranty of payment of a tenant's present and future rent liability is an example of a continuing guaranty.

Does the landlord have the right to require you to sign a personal guaranty? Generally yes, since it is the landlord's building and not yours. I am unaware of any obligation imposed on a landlord to lease office space to a new, possibly untested and under-capitalized corporation.

Do you have any other options? Other than taking your business elsewhere, perhaps you can negotiate with the landlord for a different arrangement. Maybe the landlord will accept a limited personal guaranty for a shorter period, like a year or two, after which if the rent is paid on time you and your wife would be released. Or perhaps you could post a cash deposit with the landlord to cover several months rent just in case it became necessary.

There may be other creative arrangements you could work out as well. You would probably want to think in terms of some limitations in terms of time or money that would apply, rather than purely unlimited in terms of scope.

Feel free to read the Central Building v. Cooper case discussed above for your self. You can head for www.findlaw.com and then click on California Court of Appeal cases. In the case box, enter "Central Building," scroll down to the case, select it and it should be on your screen. The link is:
http://login.findlaw.com/scripts/callaw?dest=ca/caapp4th/127/1053.html. You will of course want to discuss this entire issue with your own attorney since it clearly involves distinct legal issues with potentially serious ramifications.

Good luck with your new corporation, Tom. I hope it all works out well for you.

Donald J. DeVries
Almaden Valley


Donald J. DeVries is an attorney practicing law in Almaden Valley. If you would like him to answer your question in his next Almaden Times column, you can reach him by e-mail at don@almadenvalleylawyers.com, fax at (408) 268-6502, telephone at (408) 268-9500, or mail at, 6475 Camden Avenue, Suite 200, San Jose, CA 95120. Your matters are personal and private, so of course, he will not disclose your identity or any details about your situation. To view Almaden Times columns since 1986 visit www.almadenvalleylawyers.com. DeVries writes this column to provide you with general information about important legal matters affecting California residents—not to give you legal advice about your specific matter. No attorney-client relationship is created by these articles. The law is complex and constantly changing and varies from state to state. So you should consult an attorney before taking any action that would affect your personal or business matters.