Business Law

Business Law News 2018, ISSUE 1

Structuring Enforceable Guaranties of California Commercial Real Estate Loans: Avoiding "Fault" and "No Fault" Sham Guaranties and Other Lender Traps*

James S. Cochran and Maura O’Connor

James S. Cochran is a founding partner of O’Connor Cochran LLP, a real estate and finance law firm based in Los Angeles, California. Formerly a co-chair of the Uniform Commercial Code Committee of the California State Bar’s Business Law Section and a member of the Section’s Executive Committee, Mr. Cochran recently served as a member of the Board of Governors of the Financial Lawyers Conference. He is currently a member of the Opinions Committee of the California State Bar’s Business Law Section. He may be reached at jcochran@oconnorcochran.com.

Maura O’Connor is the managing partner of O’Connor Cochran LLP. She is the former Chairman (and first woman chair) of the Los Angeles County Economic Development Corporation. From 2009 to 2011, Ms. O’Connor wrote the national real estate industry law blog, Practical Counsel, for GlobeSt.com, the premier national commercial real estate web portal. Ms. O’Connor was named one of the top 10 real estate lawyers in Southern California by Real Estate Southern California. She may be reached at moconnor@oconnorcochran.com.

Lenders making commercial real estate loans in California have a wide range of opinions on the enforceability of any guaranties they may require in support of their loans. Some lenders consider the obstacles to enforcement to be so high that they tend to view guaranties as bargaining chips, something to be traded away as part of a consensual resolution if the loan later goes into default. Other lenders (often out-of-state lenders) assume that a typical commercial real estate guaranty (perhaps with a few California-specific waivers) is just as enforceable under California law as an absolute and unconditional guaranty with a general waiver of defenses is under New York law. Both perspectives have their adherents. Both perspectives are deeply flawed.

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