Negotiation of a commercial mortgage real estate guaranty agreement generally focuses primarily on the scope of the carve-outs to the guarantor’s so-called non-recourse liability. Sophisticated borrower’s counsel, in addition to attempting to narrow the guaranteed obligations, may, in many cases, depending of course on the relative leverage their client holds with the lender, argue that no liability to the guarantor should arise from actions occurring after commencement of foreclosure proceedings, the tender of a deed in lieu of foreclosure or the appointment of a receiver for the property.
This focus on limiting the scope of a guarantor’s liability upon a mortgage lender’s exercise of remedies is similar to the discussion that lenders have with mortgage borrowers when a mezzanine loan is offered behind a mortgage loan. In the case of a mortgage/mezzanine situation, the swift exercise of remedies by a mezzanine lender could quickly remove the sponsor from control of the property, thereby allowing the foreclosing mezzanine lender to take actions that would trigger liability for the mortgage loan guarantor relating to the commission of “bad boy” acts over which such guarantor had no control. The industry has generally responded to the mortgage/mezzanine situation by establishing conditions to the mezzanine lender’s exercise of remedies in the relevant intercreditor agreement with the mortgage lender whereby the mezzanine lender must offer a substitute guaranty to replace the original mortgage loan guaranty in respect of “bad boy” acts occurring after the mezzanine lender’s exercise of remedies. In both the mezzanine loan situation and the more traditional mortgage loan that is the focus of this article, the key issue is the same—liability must remain with the original guarantor so long as that guarantor has a direct or indirect ownership interest in the property.
Limiting Provision
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