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Texas Restaurant Law

Personal Guarantees of Corporate Obligations: The Devil is in the Fine Print

Posted in Contracts

By Ralph Perry-Miller

When entering into new vendor relationships, signing real estate and equipment leases, or merely turning in a credit application, you likely just unknowingly took on the liability personally. One of the most ignored and financially devastating acts are the routine execution of documents which either expressly or deceptively contain personal guaranties of the restaurant operating entity’s obligation. But there are ways to avoid or at least minimize your personal risk and liability. Here are some.

Common Transactions Where Personal Guaranties are Requested
or Unknowingly Included

In the case of small closely held restaurants, particularly start-ups, the Landlord will almost always include a personal guaranty for the restaurant’s principals to sign. First, of course, see if the Landlord will agree to waive the guaranty requirement.[1]

Second, even if the Landlord requires a guaranty, understand what you are guaranteeing and attempt to limit that liability. This is where a lawyer sophisticated in real estate documents comes in handy. There are several methods for limiting your risk under a personal guaranty. Put a cap on the total liability so that your total risk is at least quantified. If possible reduce the capped maximum by the amount of payments the Landlord receives from the restaurant. This is generally referred to as a “burn off” provision.

Equipment Leases

Equipment leases, signage leases and the like almost always have a personal guaranty included. With these, at a minimum know what you have signed for and make sure you exercise any termination or lease purchase options timely and properly. Often Leases continue well beyond the life value of the equipment when a small buyout payment could have been made to exercise the outright purchase of the equipment. Beware of automatic renewal provisions which automatically continue to renew the Lease annually. Calendar the option payment date then exercise it.

Trade Payables

These are the most insidious. Many vendors now routinely include personal guaranty language in the “credit app” which renders the individual signing the application personally liable for all liability including interest and attorneys’ fees if collection ensues. When signing any credit application or other document for a corporation or partnership entity always and only sign in formal legal capacity. For example, instead of signing “John Smith” sign ABC Corp by John Smith its President. In most cases this will rebut any presumption that the individual executing the document was intending to be personally liable. All of this becomes extremely important if a store fails and you need to put the location into bankruptcy because the creditors almost immediately pursue the personal guarantor.

Manage Your Guaranty Obligations Carefully

Once you have signed a guaranty, manage it carefully. If you sell the location or your interest, get your guaranty released as part of the sale transaction. If things really go south, you can also seek to at least limit any additional liability by sending notice of cancelling your guaranty. This is complicated and needs to be done with the advice of a lawyer who knows guaranty law.

So in conclusion, understand the liability you are taking on and limit it where you can both legally and practically.

Ralph Perry-Miller has handled many suits involving real estate and trade guaranties. He successfully made new law in this area with the case resulting in the Texas State Court opinion Vastine vs. Bank of Dallas.

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[1] In the current downward trending commercial real estate market, Landlords are sometimes now being more lenient on personal guaranties, especially if they are not putting a lot of money or finish-out up front.