A few days ago, I wrote a post on cannabis investing and the concept of debt v. equity. I noted that it’s very common to see lenders ask for personal guarantees when providing loans to cannabis businesses. Guaranty agreements are a hugely important type of contract that deserve their own post. Below, I will get into the weeds on guaranty agreements and explain what they are, why they are used, and their risks v. rewards.
To start, guaranty agreements are contracts where a person (personal) or a company (corporate guaranty agreements) guarantee the performance of a party to a contract. The person making the guarantee is called a “guarantor”. A guaranty agreement is independent of, but often executed in connection with, another contract.
Guaranty agreements come up in virtually any imaginable situation, so let’s look at some common examples. Oftentimes, landlords require a person to guarantee the rent obligations of tenants. From a landlord’s point of view, a guarantee is necessary to ensure there is a steady stream of rent if the tenant doesn’t have money. For cannabis tenants, who are often startups, many landlords require guarantees (if you want to read more about cannabis lease issues, read this