Guarantors, Take Notice!

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Last week, we explored some of the “why” behind those oh, so many words in today’s lease guaranties. Today, we’ll switch gears and cover some risk-related issues, nuts and bolts, so to speak.

[To see last week’s posting, click HERE. For some earlier postings, click HERE, and HERE, and HERE, and HERE.]

Last week, we wrote about the reasons why actions taken by a landlord with respect to the tenant or the lease could injure the lease’s guarantor. We didn’t give any examples, but most are obvious. They would include modifying a lease in a way that increases the guarantied obligations. Other actions or inactions that a landlord could take are those that weaken the financial strength of the tenant. Those could include post-lease agreements that allow the landlord to keep the deposit or even to allow a rent deferral. We realize that it isn’t obvious how allowing a rent deferral can weaken a tenant financially. To understand how, we need to look through the eyes of a guarantor. Last week, we discussed the tri-partite relationship between the landlord, the tenant, and the guarantor, explaining how the tenant is really obligated to both the landlord and the guarantor, Basically, if the guarantor steps up to “cover” the tenant’s obligations to the landlord, it has the right to seek reimbursement (legally, “contribution”) from the tenant. So, if the reason a tenant got a rent deferral is because it was “sinking,” to the guarantor that means that the tenant’s ability to make the reimbursement is sinking as well. The landlord, on the other hand, is somewhat indifferent if the tenant drowns. After all, it is getting part of the rent along the way and it still has a guarantor to cover the loss.

Most readers of last week’s blog posting will realize that, in reality, when a landlord waives its rights against a tenant or enters into new or revised agreements with its tenant, the guarantor is right there at the table. After all, in virtually every case, a tenant’s initial guarantor is in control of the tenant. While the guarantor and the tenant may be legally distinguishable, as a practical matter, they aren’t.

Any argument that a landlord’s actions vis a vis the tenant unfairly affects the guarantor becomes very weak, if viable at all, when the tenant is controlled by its guarantor. That’s a valid basis for lifting some protections that a guarantor otherwise might have when challenging the landlord’s claims against it. The relationship is also a valid reason for a landlord to insist that the guarantor waive its right to receive any notices of those changes or of tenant defaults. It is a landlord’s fair concern that forgetting to send any such notices could imperil the guaranty.

All of that goes out the window when the tenant and guarantor are no longer “connected.” That can happen if the lease is assigned to an unrelated party or if the guarantor no longer has an interest in the tenant. Under those circumstances, a guarantor would like to be released from the guaranty but this isn’t always something that can be negotiated. Even though it would be appropriate for such a release to take place if the “new” tenant (or even the existing tenant) is one that wouldn’t have required a guarantor in the first place or when a substitute, otherwise acceptable guarantor is available, releases just don’t happen that often. In fact, ironically, the strongest guarantors are the ones most likely to be able to negotiate a release provision, and those were guarantors that probably weren’t needed in the first place or who would be least affected by remaining on the hook. That’s an outcome of the pretty universal legal concept: “Life isn’t fair.”

So, what should a guarantor argue for at the outset? Ruminations suggests that a change of tenant or the dissociation of the guarantor from the tenant should trigger four changes in the guaranty. One is that the guarantor should get a mandatory, contemporaneous copy of every notice that a landlord sends to the tenant or is obligated to send to the tenant. We aren’t sympathetic to a landlord’s plea that this is burdensome and it shouldn’t lose any rights if it forgets to send such a notice. This is a big world and every landlord should know that it has to keep track of “who” is to get a notice and how it must be sent. After all, lots of a landlord’s leases call for duplicate notices. Their mortgages can call for sending copies of default notices to the lender. A landlord always has to look, even if lots of its leases have no such requirements. So, as a practical matter, “What’s the big deal” to a landlord? On the other hand, it is a “big deal” to a guarantor no longer in the “loop.”

Another is that a guarantor should earn the right to cure the unrelated tenant’s default, not just pay for the ashes to be carried out. Although it isn’t always possible for a guarantor to effectuate a cure, notably when to do so would require the guarantor having possession of the leased space, it would at least cover the most typical situation where all that is needed is to pay money.

The third is to allow the guarantor to get the lease back if it chooses to do so. That would give the guarantor a way to mitigate its losses. For many guarantors, notably for those with a small business with no use for the space once its business has closed, this would not be of any practical help. On the other hand, this measure can provide relief to a chain store that could re-enter the space or has the industry resources to remarket the space.

Lastly, the guaranty should bar any lease amendments or waivers of liability without the guarantor’s consent. Every landlord already should know that the safest route for itself, even in the absence of such a guaranty provision, is to get the guarantor’s consent and even get a reaffirmation of the guaranty. So, it really isn’t a further risk that a landlord will forget to get a guarantor’s consent and tenants should know that they can’t do things that would increase their guarantor’s risk.

There is, however, a legitimate landlord concern about modifications, one that is not unique to a guaranty. For example, a common mortgage provision makes it a default for the borrower to modify a lease without the lender’s consent. Should a guaranty be voided or should a mortgage go into default over a non-material lease modification? Ruminations doesn’t think so. There are hundreds of examples, so we’ll only give one illustrative one. Why should a guarantor or a lender care (or be affected) if a landlord and tenant agree that the tenant’s three exclusive parking spaces be shifted 15 feet to the right to make room for a handicap parking space?

There’s more that can be said about guaranties, and regular readers know that Ruminations is well able to write about more than even “more.” But, we won’t because today’s Ruminating is really about central concepts, notably ones that are commonly overlooked. One reader has correctly pointed out that a lot of time is spent haggling over lease provisions whereas the lease’s guaranty is often an afterthought. Also, by not attempting to include all of our thoughts about writing guaranties, we leave ourselves with issues to chew on (or rag about) in future blog postings.

Speaking of future blog postings, next week’s will not go out at its customary time, mid-day Sunday. By reason of a calendar conflict, we plan on launching it late next Monday.

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Comments

  1. RANDALL L GUNN says:

    I have been pushing landlords to only be allowed to prevent an assignment, sublease, or guaranty transfer if the default under the lease had actually been noticed by the landlord. This came to the advantage of my tenant client where the landlord was asserting a default to prevent the assignment but, the landlord had never given notice of any default.

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