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New Guaranty Enforcement Issues -- Whose Debt is Being Guaranteed?

March 20, 2012  When a Guarantor with deep pockets (or with at least some ability to pay) is called upon to pay pursuant to a written Guaranty of a commercial lease for Georgia property, the Guarantor will frequently hire competent counsel to closely examine the Guaranty in an effort to duck the liability.  Guaranty law of Georgia is notoriously slippery, but a well drafted long form Guaranty that is properly completed will typically be enforced.

We have previously written about common mistakes in completing a Guaranty, such as referencing the wrong Landlord, the wrong Shopping Center, the wrong Lease or the wrong Tenant, and using a Guaranty form that is not properly drafted. But that does not end the list of arguments up the sleeve of the clever lawyer representing the Guarantor. One such argument is whether the Guaranty applies only to the obligations of the original tenant, or whether it also applies to the obligations of an assignee.

In Blockbuster Investors LP v Cox Enterprises, Inc., decided by the Georgia Court of Appeals on March 1, 2012, the Court confirmed that under Georgia law if the Guaranty states it applies to the obligations of the “Tenant” (and does not mention the Tenant’s “successors and assigns” as part of the definition of “Tenant”), the Guarantor is NOT responsible for the obligations of an assignee of Tenant. This is because the Guaranty must specifically identify and define whose obligations were guaranteed. In the Blockbuster Investors case, the Court ruled the Guaranty language only specified that the Tenant (whose debts under the Lease were being guaranteed by the Guarantor) was the original named Tenant and not any assigns of the original named Tenant. The Court pointed out that because the Guaranty expressly provided that it could be enforced by the assigns of the Landlord—which itself is very important— but did not say anything about the Tenant’s assigns, the parties intended to not include the tenant’s assignee’s obligations in the scope of the Guaranty.

The deficiency with the Guaranty in the Blockbuster case is rather easy to correct, as are the defects and mistakes pointed out in other cases by clever Guarantors and their lawyers. But these problems must be corrected before the fact by using a properly drafted, longform Guaranty complying with Georgia laws, and by completing the Guaranty carefully and properly at execution, not after the Guaranty is in dispute. Once a dispute has arisen, as Carole King would say, “it’s too late baby!”

We hope that this brief report is helpful, but please let us (David Kitchens, Roy Ruda, Bill Berg) know if you have any questions.