Real Estate Law Alert: You Don't Have to be a 'Bad Boy' to be Liable Under a 'Bad Boy' Guaranty

more+
less-

"Bad boy" guaranties in commercial real estate loans have been commonplace for many years. However, neither guarantors, nor lenders expect guarantors to incur liability unless a "bad boy" act is actually committed. Two recent cases, however, subjected guarantors to liability previously non-existent, and have thrown the entire CMBS (Commercial Mortgage Backed Securities) industry and other commercial loan markets into upheaval. But in direct response to industry outcry against these decisions, and while these cases remain on appeal, the Michigan Senate quickly passed the "Non-Recourse Mortgage Loan Act" (effective March 29, 2012), which offers relief from these misguided decisions.

Typically, commercial real estate loans are non-recourse against the borrower, and the lender's recovery is limited to the mortgaged real estate and any other collateral pledged by the borrower. As additional security for the loans, lenders often require "bad boy" guaranties from one or more principals of the borrower. "Bad boy" guaranties generally cover borrower acts such as waste, conversion of insurance proceeds, misuse of security deposits, violating SPE* requirements and becoming insolvent. The unprecedented decline in the real estate market has thrown assets "under water", which had been a risk that lenders understood and accepted. Until these recent decisions, that scenario would not have subjected borrowers on non-recourse loans to liability in excess of the value of a property, or triggered liability under "bad boy" guaranties. That expectation, however, no longer is a given.

Please see full alert below for more information.

LOADING PDF: If there are any problems, click here to download the file.

Written by:

Published In:

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Ruskin Moscou Faltischek | Attorney Advertising

Don't miss a thing! Build a custom news brief:

Read fresh new writing on compliance, cybersecurity, Dodd-Frank, whistleblowers, social media, hiring & firing, patent reform, the NLRB, Obamacare, the SEC…

…or whatever matters the most to you. Follow authors, firms, and topics on JD Supra.

Create your news brief now - it's free and easy »

All the intelligence you need, in one easy email:

Great! Your first step to building an email digest of JD Supra authors and topics. Log in with LinkedIn so we can start sending your digest...

Sign up for your custom alerts now, using LinkedIn ›

* With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name.
×
Loading...
×