Guarantee vs. Guaranty

The Deck is Stacked Against the Little Guy

So one thing I’ve been experiencing lately is some difficulty securing a lease on a restaurant space due to landlords requiring a personal guarantee.

Which, that’s how the game is played. I signed one last time, when I leased my space in downtown Evanston in 2009 that I recently closed after a 15-year run.

It’s the only way for individuals and small companies to get loans, lines of credit, or leases.

Basically, even though you’ve gone to the trouble of establishing a corporate entity which, ostensibly provides a layer of financial protection from one’s personal assets, any time you want that entity to enter into an agreement in which you commit it to paying money to anyone over time… boom.

Sign this personal guarantee which will just nullify all the effort you spent setting up your limited liability corporation with all those layers of protection from financial liability in the first place.

Not incidentally, did you know that the terms ‘guaranty’ vs. ‘guarantee’ are different? I didn’t until recently. I kept getting emails using the former ‘y’ spelling and judgmentally noting what I thought was the person’s spelling error. I thought maybe it must be an old-timey relic that some folks still used.

Nope! Guaranty with a ‘y’ is still commonly used in legal terms and documents when referring specifically to financial debt that is to be incurred or paid. Now I know!

“Let’s think about this for a second. Why would someone put a guarantee on a box?

“Very interesting. Guy puts a fancy guarantee on a box because he wants you to feel all warm and toasty inside. You figure you put that box under your pillow at night, the guarantee fairy will come by and leave you a quarter, am I right?

“The point is, how do you know the fairy isn’t a crazy glue-sniffer? He sneaks into your house once, that’s all it takes. Next thing you know, there’s money missing off the dresser and your daughter’s knocked up.

“Hey. If you want me to take a dump in a box and mark it guaranteed, I will. I’ve got spare time.” —Tommy Boy

Anyway, the main point here is that while it’s true that anyone can establish a legal corporate entity like an LLC for the purpose of providing a layer of insulation from their personal assets and any debt/liability the corporate entity might incur, that’s really just a piece of paper.

And despite having that piece of paper, the requirement of every vendor, credit card, bank, and landlord that a personal guaranty must be signed will utterly defeat the point of having that piece of paper.

So just know that as the little guy when you sign a lease or take out a loan, you’re putting your house and your retirement accounts on the line. You’re not insulated. If the business tanks, you’re going down with the ship.

So how do the big companies do it? I’m pretty sure the CEO of Target isn’t signing a personal guarantee(y) on the equity in his house every time they lease a new location. And somehow the owners/CEO’s of big companies that go bankrupt still walk away with their personal fortunes intact.

For additional irony, let’s consider the fact that that landlords always prefer to lease to large corporate entities rather than little guys, so it’s already harder for us to find spots to lease to us.

Why? I don’t get it. To me it seems like big corporate entities would be more difficult to come after when they break a lease, what with all their on-staff corporate lawyers on retainer, already well versed in the various ways they can wriggle and maneuver to squeeze money out of these situations.

But they want to come after us little guys and the little bit of equity we have in our homes? That’s better somehow?

Ultimately, each piece of paper you sign is just one more piece of paper that may or may not come in handy to use against you if/when you eventually are taken to court. Even the personal guaranty(ee) doesn’t mean anything if you’re evicted. When the dust settles and there’s debt on the books, creditors (or whoever they end up handing it off to) are going to settle for what they think they can get at the end of the day.

Really, whether you spell it guarantee or guaranty, it’s a fiction that’s there to make the lender feel more assured and the borrower feel more obliged.