In connection with a commercial lease with an international company, a commercial landlord is often asked to accept U.S.-based subsidiary as the tenant entity. The U.S. subsidiary often does not have independent financials or credit history, leading the landlord to request additional lease security. In this context, the landlord may be offered a guaranty from a foreign-based parent company. Although it may seem prudent to accept a guaranty from an international entity with substantial assets, these guaranties present certain challenges. Even if the foreign guarantor has significant financial strength, a guaranty may prove worthless if the landlord cannot collect on a judgment against the guarantor.
The following are guidelines to follow when accepting a guaranty from a foreign corporation or entity:
- The foreign entity that will act as the named guarantor should be a legal entity that generates standalone, audited financial statements. This requirement is easy to satisfy if the entity is publicly traded and must release financials for public review.
- The guaranty should provide that the guarantor is obligated to provide current audited financials without further request at stated intervals, preferably quarterly.
- The guaranty should state that the guarantor consents to jurisdiction in the State in which the leased property is located and that applicable State and federal law govern.
- Confirm that the country in which the foreign guarantor is incorporated and based will enforce a judgment entered in the United States. If there is not a clear legal basis for enforcement of a judgment entered in the United States, an international arbitration clause must be included in the guaranty. Arbitral awards are much more easily enforceable internationally than United States judgments. The United States is not a party to any international conventions on recognition of civil judgments. However, the United States, along with most world nations, has ratified the New York Convention. Under the New York Convention, nations, generally speaking, will enforce arbitration awards from other nations.
- If the guaranty provides for litigation as the means of enforcing or resolving a dispute, the landlord should require that the guarantor’s legal counsel issue an opinion confirming that the courts of the guarantor’s nation will enforce a United States judgment without a new trial or legal proceeding.
- The guaranty should specify notice addresses and the means of giving effective notice to the guarantor, and should also specify an agent for service of process on the guarantor in the State in which the leased property is located.
- The guaranty should provide for recovery of all fees incurred by the landlord in enforcing the guaranty, including the costs of obtaining and enforcing a judgment or arbitral award outside of the United States.
- The guarantor should deliver proof that it has duly authorized the guaranty through necessary corporate action and that the signatories are authorized to bind the guarantor.
- The amount of the guaranty obligation should be stated in United States dollars.
Although guaranties from foreign corporations can be tricky to enforce, careful consideration of the provisions to be included in the initial guaranty document will enable a commercial landlord to be much more confident in its ability to such a guaranty if necessary.
Please contact us with any questions or for assistance in generating a foreign guaranty that suits your needs.