Carve-Out Guaranty

Carve-Out Guaranty

A Carve-Out Guaranty is a specific provision often included in commercial real estate financing agreements, particularly in loans secured by income-producing properties. It serves as a limited guarantee where the guarantor agrees to cover certain specified financial obligations of the borrower, typically in the event of default, while excluding other potential liabilities.

In a standard Carve-Out Guaranty, the guarantor’s obligations are restricted to particular "carve-out" events, which might include instances of fraud, gross negligence, or environmental violations. This means that the guarantor is not responsible for all debts or liabilities of the borrower, but only for those outlined in the agreement.

For example, if a company borrows money to purchase a commercial property, the lender may require a Carve-Out Guaranty from the company’s principal. If the property suffers severe damage due to the principal’s negligence or if the company commits fraud in securing the loan, the guarantor may be held liable for the losses attributable to those actions. However, if the company’s financial struggles are due to market conditions or other non-excluded factors, the guarantor would not be liable, protecting them from unlimited financial exposure.

This type of guaranty is commonly used to provide lenders with some assurance of repayment while limiting the risk for the guarantor, making it a useful tool in real estate financing.