Bad boy guaranties, also known as springing guaranties or non-recourse carveouts, are a common feature of commercial real estate transactions. They are designed to protect lenders from borrowers who engage in certain “bad acts” that could harm the property’s value or the lender’s security interest. In this article, we will explore what bad boy guaranties are, how they work, and how you can protect yourself as a borrower.
What Are Bad Boy Guaranties?
Bad boy guaranties are provisions in loan agreements that allow lenders to seek recourse against guarantors for specific “bad acts” committed by the borrower. These acts typically include fraud, waste, environmental violations, and other actions that could harm the property’s value or the lender’s security interest. In contrast to traditional guaranties, which are triggered by a borrower’s default, bad boy guaranties are only triggered by these specific “bad acts.”
How Do Bad Boy Guaranties Work?
Bad boy guaranties work by making the guarantor responsible for the borrower’s “bad acts.” If the borrower engages in one of the specified acts, the lender can seek recourse against the guarantor, even if the borrower is current on the loan payments. This means that the guarantor could be liable for the full amount of the loan, not just the amount of the loss resulting from the “bad act.”
How Can You Protect Yourself as a Borrower?
As a borrower, there are several steps you can take to protect yourself from the risks associated with bad boy guaranties:
Negotiate the Terms
When negotiating a loan agreement, try to limit the scope of the bad boy guaranty provisions to only the most egregious acts, such as fraud or intentional misconduct. You may also want to negotiate a cap on the amount of the guarantor’s liability.
Consider a Separate Entity
If you are concerned about the risks associated with bad boy guaranties, you may want to consider forming a separate entity to hold the property. This can provide an additional layer of protection for your personal assets.
Get Legal Advice
Before signing a loan agreement with a bad boy guaranty provision, it is important to seek the advice of an experienced real estate attorney. They can review the terms of the agreement and help you negotiate more favorable terms.
Bad Boy Guaranties: The Bottom Line
Bad boy guaranties are an important tool for lenders to protect their interests in commercial real estate transactions. However, as a borrower, it is important to understand the risks associated with these provisions and take steps to protect yourself. By negotiating the terms, considering a separate entity, and seeking legal advice, you can minimize your exposure to liability and ensure a successful transaction.
