Personal Guaranty of Commercial Lease just got Personal in California

Effective January 1, 2021, Assembly Bill 1885, increases the creditor homestead exemption for personal residences in California.

Commercial landlords often take comfort in holding a personal guaranty on corporate real estate leases. The thinking is that landlords can always look to the personal guarantor (often an individual) and any home equity for repayment if the corporate tenant defaults. That comfort may go away on January 1, 2021. The reason is that California's archaic homestead exemption amounts (previously $50,000 to $175,000) are increased to $300,000 to $600,000, effective January 1, 2021, with adjustments for inflation.

This means that landlords cannot touch $300,000 - $600,000 of home equity in the guarantor’s personal residence in the event of a tenant default. Based on the high price of homes in California, landlords are likely facing the maximum exemption, not the minimum, and may be left holding the bag if the tenant goes under unless the home is unencumbered. Ouch!

California's archaic and frustrating homestead exemption gets a fresh and cleaner update, allowing a baseline exemption of $300,000 and as high as $600,000.

What can commercial landlords do? If there is already a commercial lease and personal guaranty in place, you may be stuck. You should review the lease and guaranty and determine if you can request updated guarantor financial information and/or exercise any remedies under the lease or guaranty due to the change in the law. On new commercial lease transactions, you should evaluate the amount of available home equity taking into account the updated homestead exemption, and see where you will likely stand if things go bad. This may involve obtaining a title report, property profile, broker opinion of value or appraisal. You should also consider other possible options such as additional tenant security deposit, a letter of credit, taking a secured note and deed of trust from the guarantor up front to tap into the home equity, among other options.

This article provides only general information, and note legal advice. If you are seeking legal advice on how the changes to AB 1885, California's Homestead Exemption, apply to you, reach out to us at info@mcc-lawyers.com. You can read California Assembly Bill 1885 in full here.