Completion Guaranties in Construction Lending: Key Provisions for Lenders and Guarantors

Description

In a construction loan, a principal concern for the lender is that the borrower will fail to complete the project, leaving the lender to oversee construction of a partially finished building. Under a completion guaranty, the sponsor or other qualified third party agrees to complete the project in accordance with approved plans, on schedule, within budget, free of lien claims and otherwise in accordance with the loan documents.

Because they impose personal liability, completion guaranty provisions are of particular importance to the guarantor. Terms may vary depending on the size and scope of the deal, the credit and track record of the sponsor, or the existence of a performance bond, insurance or other risk mitigation measure.

Counsel must be prepared to negotiate certain terms of the guaranty agreement to limit their clients’ exposure: the obligation to complete construction should be conditioned on the lender fully funding the loan; the completion guaranty should only cover “hard” construction costs and not interest and other carrying costs on the loan; damages should be limited to the lender’s deficiency after disposition of collateral; the construction completion guaranty should terminate upon a foreclosure or other sale; and more.

Listen as our authoritative panel examines various aspects of completion guaranties and provisions of particular concern to lenders and guarantors. The panel will also discuss provisions that can limit guarantor’s obligations under the guaranty and factors which might affect the ability of counsel to negotiate those provisions.