United States: Understanding The Scope Of A Bad Boy Guaranty

In the bygone days of pure non-recourse financing, if a borrower was unable or failed to perform its obligations under the mortgage loan documents, lenders would look solely to the underlying collateral for the recovery of the debt. In that scenario, lenders were essentially out of luck if the value of the collateral fell to a level below the outstanding balance of the mortgage debt. To add insult to injury, many lenders quickly learned that this lack of personal liability enabled, and in some instances encouraged, distressed borrowers to covertly siphon cash out of the property in the months leading up to a default.

Enter the bad boy guaranty.1 These limited guaranties were initially intended to keep borrowers and their principals honest. If the borrower committed certain bad acts, such as misappropriating funds, then the borrower and the guarantors (who were typically key principals of the borrower) would be liable to the lender for the losses suffered by the lender as a result of such acts.

In cases where the bad act was particularly egregious – such as filing a voluntary bankruptcy action or interfering with the lender's foreclosure action – the loan would become fully recourse to the borrower and the guarantors. These guarantees were specifically intended to prevent the principals of the borrower from diluting the value of the collateral or performing certain actions in derogation of the lender's enforcement rights.

Today, the bad boy guaranty is ubiquitous in modern commercial mortgage financing transactions, but the actual recourse provisions tend to vary from lender to lender. What was once a relatively straightforward list of limited bad acts has, in some cases, expanded into dozens of complex provisions designed to cover every conceivable instance where a borrower could possibly go astray. For this reason, it is prudent for borrowers and guarantors to fully understand the scope of its lender's proposed bad boy guaranty before signing the term sheet or loan commitment, and it is imperative that the borrower, the guarantor (and their counsel) carefully read every provision of the bad boy guaranty prior to execution.2

Each of the bad acts (and their corresponding level of liability) should be carefully scrutinized at the outset of negotiations to ensure that the borrower and guarantors are aware of the potential liability arising out of their actions or inactions. Accordingly, the following discussion is intended to provide basic guidance in negotiating non-recourse carve-out provisions in real estate loan transactions.

Many term sheets and loan commitments simply refer to the lender's "standard recourse carve-out provisions," while failing to delineate the particular events or actions that can trigger personal liability in an otherwise non-recourse loan transaction. In those cases, it is prudent for borrowers to request that lenders specify the exact terms of the recourse carve-out provisions in the term sheet or loan commitment so that the guarantors can make an informed decision at the outset of negotiations, and before any loan deposits are made. In many cases, a lender will, if asked, provide a copy of its standard bad boy guaranty for a borrower's review during the term sheet or commitment phase. The terms of the bad boy guaranty should be negotiated at that juncture, well in advance of the frenzied push toward closing, which allows the parties to concentrate on getting the deal done.

In addition to the actual carve-out events themselves, it is important to have a clear understanding of which events which will trigger limited liability (i.e., a lender's actual losses) as opposed to full recourse liability under the loan. Take, for instance, the concept of "waste." A typical bad boy guaranty will include a provision making the guarantor liable for the lender's actual loss incurred as a result of the borrower's commission of waste at the property.

This sounds simple enough, right? But what exactly constitutes "waste?" It could mean the failure to pay real estate taxes.3 Should it be limited to "physical waste" or, better yet, "intentional physical waste?" What about this scenario? If a borrower loses a tenant and there is a cash flow shortage for a period of time, should a borrower who uses its remaining cash flow to pay the current installment of real estate taxes as opposed to servicing the HVAC system be liable to the lender for the cost of replacing it if it stops working. The borrower will argue that it did not intentionally cause the damage to the HVAC system – it simply did not have sufficient funds to make the repairs at that time. But it's a completely different story if the borrower made distributions to its principals instead of repairing the HVAC system. A carefully negotiated bad boy guaranty will address this distinction.

Today, almost all bad boy guaranties provide that a breach of the borrower's single purpose entity (SPE) covenants constitutes a full recourse event.4 While there may be some justification for such a position when the breach is egregious, there are many instances where technical violations of these covenants are so minor that a reasonably prudent borrower or guarantor would not expect to become fully liable for the debt as a result. One such example is a borrower failing to maintain separate letterhead.

Bad boy guaranties serve an important purpose. However, it's important for lenders and borrowers alike to not lose sight of their intended purpose. Bad boy guaranties are supposed to level the playing field by providing lenders with a measure of protection against bad borrowers. What they're not supposed to do is turn a non-recourse loan into a recourse loan, except in very limited circumstances.

While there have been numerous challenges to the validity of these types of guaranties, courts generally have been unwilling to alter the plain meaning of the documents, and have enforced their provisions over objections of public policy concerns and claims of unenforceable penalties – particularly where the parties involved are sophisticated investors.5 So it clearly behooves bad boy guarantors to review the actual provisions of the bad boy guaranty with legal counsel at the outset of the loan transaction, in order to avoid misunderstandings later on.


1 The technical name for these types of guaranties, depending on the lender, varies. Most are referred to as "Non-Recourse Carve-out Guaranties" or some variation thereof.

2 See, e.g., Steven Weinreb v. Fannie Mae, 993 N.E2d 223 (Ind. App. 2013). The court rejected the guarantor's argument that he had not read the guaranty before signing it, that its complexity was overwhelming and that it was unconscionable.

3 See, e.g., Travelers Insurance Company v. 633 Third Associates, Tower 41 Associates, Joseph T. Comras, Stanley Stahl, Robert Travelers Insurance Company v. 633 Third Associates, Tower 41 Associates, Joseph T. Comras, Stanley Stahl, Robert Carmel and Citibank, N.A., as Trustee of Citibank, N.A. Commingled Employee Benefit Trust, 14 F. 3rd 114 (2nd Cir. 1994). The court held that the borrower's willful failure to pay real estate taxes constituted actionable waste, thereby triggering recourse under the bad boy guaranty.

4 See, e.g., Wells Fargo Bank, N.A. v. Cherryland Mall Ltd Partnership, 812 N.W.2d 799 (Mich. Ct. App. 2011). In the Cherryland case, the court construed the lengthy and complex SPE and separateness provisions to mean that the mere insolvency of the borrower triggered full recourse to the guarantor, even though there was no bankruptcy filing. The guarantor did not collude in or otherwise cause a bankruptcy, but the court was guided by the plain meaning of the provision. The full recourse result was, therefore, an unintended consequence, as the guarantor did not expect to assume general responsibility for the solvency of the borrower. Recognizing the danger posed by this decision, the Michigan legislature essentially overturned it through the passage of the Michigan Nonrecourse Mortgage Loan Act on March 29, 2012.

5 See, e.g., UBS Commercial Mortgage Trust 2007-FL1 v. Garrison Special Opportunities Fund L.P., 938 N.Y.S.2d 230 (N.Y. Sup. 2011) and Bank of America, N.A. v. Lightstone Holdings LLC, 938 N.Y.S.2d 225 (N.Y. Sup. 2011). In these cases, the guarantors argued that the guarantees were unenforceable because, inter alia, it is against public policy to essentially prevent a borrower from filing for bankruptcy, and impeded financial restructuring. The courts rejected these arguments, holding that there is no public policy that allows borrowers and guarantors to avoid their contractual obligations and that the courts are not in a position to re-write the terms of the contracts.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.