Personal Guaranties in Tennessee: What Owners Sign for Leases and Loans

When a small business signs a commercial lease or takes out a loan, the landlord or lender often asks the owner to sign a personal guaranty too. The company is the tenant or borrower; the owner pays if the company does not. Tennessee guaranty law is old, fairly settled, and mostly friendly to the person holding the guaranty, so the wording matters.

What a guaranty is, and how it differs from co-signing

A guaranty is a promise to answer for someone else's obligation. Tennessee's statute of frauds describes it as a "special promise to answer for the debt, default, or miscarriage of another person" (Tenn. Code Ann. § 29-2-101(a)(2)). Your LLC's liability shield does not reach a promise you make in your own name. In 84 Lumber Co. v. Smith, 356 S.W.3d 380 (Tenn. 2011), an LLC's president signed a credit application stating, just above the signature line, that the signer personally guaranteed the account. The Tennessee Supreme Court held that he signed both for the company and as an individual guarantor.

Co-signing is different. Someone who signs the promissory note itself to support the borrower, without being a direct beneficiary of the loan, is an accommodation party under Tennessee's Uniform Commercial Code, obliged to pay the note in the capacity in which he or she signed, such as a maker (Tenn. Code Ann. § 47-3-419(a), (b)). A guaranty is usually a separate document, and the rules for the two are not identical.

The guaranty has to be in writing and signed

Under Tennessee's statute of frauds, no action can be brought on a promise to answer for another person's debt unless the promise, or some memorandum or note of it, is in writing and signed by the party to be charged or someone lawfully authorized by that party (§ 29-2-101(a)). The Tennessee Supreme Court has said there can be no doubt that this applies to a guaranty (In re Estate of Dickerson, 600 S.W.2d 714 (Tenn. 1980)).

Dickerson involved a restaurant lease. A man not named as a party signed at the end, but the lease contained no promise by him to guarantee the corporate tenant's performance. His signature did not satisfy the statute, and later oral statements that he had signed as a guarantor could not fill the gap. Read with 84 Lumber, the words on the page decide the question in both directions.

Payment or collection

Tennessee cases distinguish a guaranty of payment from a guaranty of collection. In Hassell-Hughes Lumber Co. v. Jackson, 33 Tenn. App. 477, 232 S.W.2d 325 (1949), the Court of Appeals adopted the chancellor's explanation that a guaranty of payment binds the guarantor to pay at maturity if the principal debtor has not, so that on default the guarantor's obligation becomes fixed. A guaranty of collection obligates the guarantor to pay only on condition that the creditor has prosecuted the debtor without success. For a signature on a negotiable instrument that unambiguously guarantees collection, the UCC requires that a judgment against the debtor has gone unsatisfied, the debtor is insolvent or in an insolvency proceeding, the debtor cannot be served, or it is otherwise apparent that payment cannot be obtained from the debtor, before the guarantor must pay (§ 47-3-419(d)).

Many forms close this door. The bank guaranty in Shelby Electric Co. v. Forbes, 205 S.W.3d 448 (Tenn. Ct. App. 2005), had the guarantor waive any right to require the lender to proceed first against the borrower or to exhaust collateral.

Continuing guaranties and revocation

A continuing guaranty is one that is not limited to a particular transaction but is intended to cover future transactions until revoked (Farmers-Peoples Bank v. Clemmer, 519 S.W.2d 801 (Tenn. 1975)). Under a continuing guaranty, the creditor has no obligation to tell the guarantor that new debt is being incurred unless the guaranty requires it (SunTrust Bank, East Tennessee, N.A. v. Dorrough, 59 S.W.3d 153 (Tenn. Ct. App. 2001)).

Third National Bank in Nashville v. Friend, 626 S.W.2d 464 (Tenn. Ct. App. 1981), shows how far that can go. A wife signed a continuing guaranty with the papers for a home loan. That loan was repaid, but the bank kept the guaranty and enforced it for her husband's later loans. The court held her liable, saying relief from such guaranties would have to come from the legislature. Tennessee later passed a statute requiring a written agreement to guarantee future obligations under a continuing guaranty, but it applies only when the borrower's debt arises from personal obligations, not commercial ones (Tenn. Code Ann. § 47-12-107).

Revocation is mostly a matter of the document's terms. In Hickory Springs Manufacturing Co. v. Evans, 541 S.W.2d 97 (Tenn. 1976), the guaranty could be revoked by written notice by registered mail, revocation would not affect debt already owed, and because the owners never sent notice, they remained liable. Dorrough's guaranty ran until the bank actually received written notice of revocation. Selling out of the company does not end a guaranty by itself: the Hickory Springs owners had sold their stock and were still liable.

How Tennessee courts read a guaranty

For commercial guaranties, Tennessee reads the document against the guarantor. The Tennessee Supreme Court has said it has been settled law for at least 120 years, since Bright v. McKnight (1853), that a guarantor in a commercial transaction is held to the full extent of his engagements, and that the words of the guaranty are taken as strongly against the guarantor as the sense will admit (Clemmer). The Court added that a commercial guaranty "is not an ordinary contract." The Court of Appeals has put it more bluntly: in order to facilitate the extension of credit, Tennessee does not favor guarantors (Dorrough).

Ordinary contract rules apply too: where the language is clear, courts enforce it as written (Dorrough; 84 Lumber). There is a limit. In Shelby Electric, the Court of Appeals held that a boilerplate waiver of "any defenses" did not waive the guarantors' defenses of fraud and fraudulent inducement, particularly where fraud was not specifically mentioned. The court expressly left open whether a specific waiver of fraud defenses would be enforceable in Tennessee.

Changes to the lease or loan, and the waivers that cover them

Tennessee recognizes some suretyship defenses. A release of the principal debtor generally releases the guarantor to the extent of the release, unless the creditor reserves its rights against the guarantor or the guarantor consented to remain liable (Hickory Springs). The surrender or release, without the guarantor's consent, of security the creditor held when the debt was guaranteed can discharge the guarantor (Ottenheimer Publishers, Inc. v. Regal Publishers, Inc., 626 S.W.2d 276 (Tenn. Ct. App. 1981)).

In practice, the guaranty usually answers these questions first. Tennessee courts have given effect to:

• A consent to remain liable despite any settlement or compromise with the debtor. In Hickory Springs, the creditor settled with the company for half the debt, and the guarantors were still liable for their full capped amount.
• Authority for the creditor to renew, extend, or change the manner of payment without notice, which the court read together with the continuing guaranty as consent to the release of collateral (Dorrough).
• An agreement that the note could be modified, sold, or assigned without affecting the guaranty (Blue Water Bay at Center Hill, LLC v. Hasty, No. M2020-01336-COA-R3-CV (Tenn. Ct. App. June 26, 2023), perm. app. denied (Tenn. Dec. 19, 2023)).
• A personal guaranty of lease payments that incorporated "absolute and unconditional" terms, including that the obligations were not affected by delay in enforcing rights, which the court held expressly waived the statute of limitations (Hardeman County Bank v. Stallings, 917 S.W.2d 695 (Tenn. Ct. App. 1995)).

Older Tennessee law did recognize that a binding extension of time given to the borrower, without the guarantor's consent, could release a guarantor who signed a note (Mechanics' Bank & Trust Co. v. Hood, 126 Tenn. 443 (1912)). For negotiable instruments, the UCC now discharges an accommodation party only to the extent an extension or material modification causes loss (§ 47-3-605(c), (d)). What I have not found is a Tennessee appellate decision stating a general rule for when an amendment to a commercial lease, such as a longer term, more space, or higher rent, discharges a guarantor who did not consent to it. The guaranties in the cases above contained consent language that settled the question before it came up. When a lease is amended or renewed, the guaranty's consent language, read alongside the amendment and the other lease terms worth slowing down for, is the first thing I check.

Caps, burn-offs, and good guy guaranties

These are drafting terms, not rules of Tennessee law.

• A limited or capped guaranty sets a maximum. Read what sits outside the cap. The guaranty in Dorrough capped principal at $2,000,000 but added interest, attorney fees, and collection costs on top of it.
• A burn-off reduces or ends the guaranty after a period, often tied to on-time payment. As discussed in reading a commercial lease LOI, the letter of intent is the natural place to raise a cap or burn-off.
• A good guy guaranty, used in some commercial leases, generally limits the guarantor's exposure to obligations through the date the tenant gives notice, pays what is owed, and turns the space back over in the condition the lease requires. Those conditions deserve the closest read.

Spouses and Regulation B

Regulation B, which implements the Equal Credit Opportunity Act, generally bars a creditor from requiring the signature of an applicant's spouse on any credit instrument if the applicant qualifies alone under the creditor's standards (12 C.F.R. § 1002.7(d)(1)). For this rule, "applicant" includes guarantors (§ 1002.2(e)). It covers business credit as well as consumer credit. Whether it reaches a landlord's lease guaranty is a separate question, discussed below. The official interpretation lets a creditor require guaranties from a business's partners, directors, officers, or the shareholders of a closely held corporation, but not automatically require the spouses of married officers to sign. If an additional party is needed to support the credit, the spouse may serve, but the creditor may not require that it be the spouse (§ 1002.7(d)(5)). A spouse's signature may still be required on documents needed under state law to make collateral available, such as the deed of trust on jointly owned property, though the official interpretation says the creditor generally may not also require the spouse to sign the note if signing the security document is enough (§ 1002.7(d)(4) and official interpretation 7(d)(4)-1).

Whether a guarantor spouse can use a violation in court is less settled. In RL BB Acquisition, LLC v. Bridgemill Commons Development Group, LLC, 754 F.3d 380 (6th Cir. 2014), a case from the Eastern District of Tennessee, the Sixth Circuit deferred to the regulation's inclusion of guarantors and allowed the violation to be raised as a defense of recoupment, which lets the guarantor offset her own damages against the amount the creditor claims. The court did not decide whether Tennessee law would go further and treat the guaranty as void. The Eighth Circuit reached the opposite conclusion, and in that case, Hawkins v. Community Bank of Raymore, the Supreme Court affirmed by an equally divided Court in 2016, with no majority opinion. The Sixth Circuit relied on Chevron deference, which Loper Bright Enterprises v. Raimondo (2024) overruled, although the Court said it was not calling into question prior cases that relied on Chevron, and that their holdings remain subject to statutory stare decisis. Regulation B is written for creditors and credit transactions. Whether a commercial lease counts as credit, and a landlord as a creditor, under the regulation's definitions (§ 1002.2(j), (l)) is a threshold question, and I have not found a Tennessee appellate decision holding that Regulation B applies to a landlord's request for a spouse's guaranty of a lease.

How long a claim on a guaranty lasts

An action to enforce a contract of guaranty is governed by Tenn. Code Ann. § 28-3-109(a)(3), which requires actions on contracts not otherwise expressly provided for to be brought within six years after the cause of action accrued (First American Bank of Nashville, N.A. v. Woods, 734 S.W.2d 622 (Tenn. Ct. App. 1987)). When the six years begins depends on the guaranty and the default, and in Hardeman County Bank the guarantors had waived the statute in the document itself. Where a loan was secured by real estate that has been foreclosed, a separate statute sets a deadline of no later than two years after the sale for a deficiency action (Tenn. Code Ann. § 35-5-118(d)), and whether that deadline reaches a suit on a separate guaranty is a question I would check rather than assume. A company's bankruptcy generally does not end the guaranty either. Federal bankruptcy law provides that the discharge of a debt of the debtor does not affect the liability of any other entity on that debt (11 U.S.C. § 524(e)). In Dorrough, the borrowers had been liquidated in Chapter 7, and the court still enforced the guaranty.

A guaranty usually becomes urgent when a default notice arrives, but by then its terms are fixed. If you have been asked to sign a personal guaranty for a lease or a loan, or you want to know what an older guaranty still covers, my office can review it alongside the commercial lease or other contract documents it backs.

Educational disclaimer: This article provides general Tennessee educational information only and is not legal advice for any specific guaranty, lease, or loan.