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California Commercial Real Estate Loan Guaranty Waivers & Antideficiency Protection; Can It Be Waived, And What Happens If The Law of Another State Governs?

Commercial real estate lenders often require a guaranty signed by a financially responsible California guarantor. Included in the guaranty is a waiver of specific rights, often including a waiver of the antideficiency rights of California Codes of Civil Procedure sections 580 and 726. These are significant rights being given up; for this reason potential guarantors presented with waivers should consult with an experienced Sacramento and Yolo commercial real estate lawyer to fully understand what the consequences of the waivers may be.

Such waivers were included in the guaranty in Gramercy Investment Trust v. Lakemont Homes Nevada, Inc. which involved foreclosure of a $35 million dollar loan on a commercial development. The twist in this case was that the guaranty stated that New York law governed the document. California sections 580a and 726 (waived by the guarantor) limited deficiency judgments to the difference between fair market value and the entire amount of the loan balance due at time of foreclosure. New York law also has similar antideficiency protection, though with a different calculation. The court calculated the deficiency without applying California law, and the borrower appealed, arguing that New York law, and its antideficiency protections, should have been applied.

apartment_houses.jpgThe court of appeal found first that, here New York law did not apply. First looking at the choice of law provision, it found that New York antideficiency rules do not apply when the real property is not located in New York. The courts of New York agree with this proposition. Additionally, as California has similar protection for debtors against certain deficiency judgments, it is of little consequence whether New York or California law applies.

Next, the court found that the borrower had waived its California protection. Civil Code section 2856 provides that a guarantor may waive rights and defenses that otherwise would be available to the guarantor, including antideficiency protections. The language of the waiver in this case was clear, unequivocal, and in language expressing an intent to waive rights or defenses based on sections 580a and 580b, 580d, and 726 as well as other rights. Whether New York law applied or not, the guarantor had waived all antideficiency protections, so the result would be the same no matter which law applied.

Waivers are powerful legal documents that guarantors routinely sign without fully understanding what rights they are giving away. Sometimes they may be able to negotiate for reductions or carve-outs of the waiver provision, but often it is a take it or leave it situation. Before signing a guaranty, it is a good idea to know something about what you are really giving up.