Did They Guaranty The Lease For Its Extended Term?

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We’ve written about guaranties before, most directly in postings that can be seen by clicking: HERE and HERE. Today, we drill down to the enforceability of a lease guaranty after the lease has been modified, but without notice to or knowledge of the guarantor. Today’s Ruminating is informed by a January, 2018 unpublished opinion from the Maryland Court of Special Appeals. [Readable by clicking: HERE.]

A church’s lease was guaranteed by its Pastor, his wife, and six other church members. The church defaulted and its landlord sued for the remaining rent under a three-year extension properly signed by the Pastor on behalf of the church, but without the knowledge of the six church members. In fact, they didn’t even have a hint that the lease had been extended despite each being some form of “leader” in the church, though those roles appeared to be substantially ceremonial. Their only financial connection to the church was their obligation to tithe to it. The lower court described them as “commercially” unsophisticated.

The lease extension was by way of amendment. The lease did not have an extension option. The additional three-year term was related to a rent reduction sought by the Pastor and agreed-to by the landlord. The church performed until it didn’t with eight months to go in the lease’s term. At that time, by agreement with its landlord, the church vacated its premises.

The six “lay” guarantors got two surprises. The first was finding out about the lease extension only when they were served with a collection law suit. The second was that when the Pastor and his wife filed for bankruptcy, they were the only remaining guarantors. It is unlikely they were pleased to learn these two things.

Neither the lease nor the guaranty mentioned or even appeared to contemplate a future extension of the term of the lease. So, the landlord directed the court to the following provision in the guaranty (with some italicizing by the court):

That Landlord may exercise or forbear from exercising any rights against the Tenant under said Lease Agreement or otherwise act or forbear from acting and may settle or compromise any rent which may become due under said Lease Agreement without notice to or consent of Guarantor or grant or make any accommodations, alterations, modifications, indulgence, to Tenant all without releasing Guarantor from its obligations hereunder or limiting or impairing its liability.

The lower court found against the landlord, holding:

neither the lease nor the guaranty “expressly or implicitly” [grant the landlord the right to effectuate] “a Lease extension or Amendment without prior notice or consent,” nor was such prior notice or consent “sought [or] obtained.”

“Accordingly, the lower court held that [the guarantors] were not responsible for rent or for any other monetary obligation due under the lease extension amendment.”

So, what is a guaranty? The Maryland Appellate court explained:

[a] contract of guarantee is a form of commercial obligation, in which the guarantor promises to perform if the principal does not.

As a contract, a guaranty is subject to the general tenets of contract interpretation adopted by our Maryland courts.

Those tenets require us to engage in what is known as an “objective approach” to contract interpretation. That approach demands that unless a contract’s language is ambiguous, we give effect to the language of a contract as written, without concern for the subjective intent of the parties at the time of formation.

But, when there are ambiguities in the language of a contract, those “ambiguities are [to be] resolved against the draftsman of the instrument.

Moreover, and of particular relevance here, as “[t]he liability of a guarantor is created entirely by his contract, it is strictly confined and limited to his contract. No change can be made in [it] without his consent.”

So, using an “objective” approach, was an extension to the lease’s term one of the following: an accommodation, alteration, modification or indulgence? The landlord contended it was merely a “modification” and thus neither notice to, nor consent from, the guarantors was required.

The appellate court wasn’t so quick to agree with the landlord. Instead, at best, it found an ambiguity, holding that “neither the lease nor the guaranty addressed the issue of a lease term extension.” The landlord offered three prior court decisions as support for its contention that a lease extension was a “modification.” Not only did the court reject that contention, but it ruled that the three cases stood for the opposite proposition. [Those cases are identified in the opinion whose link we’ve already given.]

Nothing in the lease or in the guaranty even suggested that the lease’s term would be extended and the guarantors had no reasonable expectation that it would be. The lease was clear that it would expire in five years. Further, according to the court, even if the issue was ambiguous, it would have ruled against the draftsperson, i.e., against the landlord.

Importantly, the court offered an alternate basis to reach the same result. Look carefully at the “clip” we’ve reproduced from the guaranty. Do you see that the “no notice to or consent from” the guarantors pertains to how the landlord deals with rent, and not with how it deals with lease modifications? So, even if the court had found the lease extension to be a “modification,” it would have found that the liability of the guarantors arising out of the modification would have required notice and consent.

The guaranty doesn’t make it really obvious that requiring notice to or consent from the guarantors would NOT be needed before they would be liable under the lease modification. There was no explicit statement in the guaranty that such WOULD HAVE BEEN needed. Such a conclusion might seem “fair,” but “fairness” isn’t always the driving force behind a legal outcome. Instead, the court, using logic Ruminations has tried, many times, ruled that because the guaranty didn’t say that consent was NOT required, consent WAS required. [No, we don’t think the court subscribes to Ruminations; we learn from courts, not vice versa.] Basically, if a document expressly calls for something, such as the need for notice and consent, in certain cases, then where it doesn’t do so, courts get “permission” to rule that “something” doesn’t apply. The guaranty said that notice and consent would be waived for forbearances from acting and settling or compromising on rent, but didn’t say the same thing when it came to modifications.

Here’s a practical example. Form leases and other documents are replete with provisions calling for the need for one party or the other’s approval. Then, one party or the other get the word “reasonable” inserted before some, but not all, instances of the words “approval” or “consent.” Generally, when used in their unmodified forms, “approval” and “consent” are held to require the granting party to be reasonable. [That’s for another blog posting.] But, if an agreement says that some approvals must be reasonably granted and says nothing about other required approvals, does that mean the unconditioned ones may be unreasonably withheld? Or, what about the reverse case? If an agreement expressly says that certain approvals may be withheld for any reason or no reason at all, does that mean that all of the other required approvals must be dealt with in a reasonable manner?

So, where does Ruminations come out today?

First, we don’t understand why our documents use “approval” in some places and “consent” in other places. Though we haven’t heard of a dispute over the distinction between both terms, we predict there will be and see no advantage in using one term over the other. So, use “approval” or use “consent,” but not both.

Second, let’s read what we write. If the intention is that “no notice or consent” is needed, then say so. Let’s read what we write. Does our document say what we intended? It is a common error to place modifying words or phrases in the wrong place, as was the case here.

Third, if you want an outcome, then ask for that outcome. Here, if the guarantors were to be liable for (possibly) unlimited lease terms extensions, the guaranty should have said so. Yes, that might alert the guarantors to the issue, but wouldn’t the battle better be had before the lease is signed than later, in court?

Fourth, don’t cherry pick certain provisions in a lease or other agreement by adding modifiers unless you really want to give up the argument that all similar, but unmodified, provisions are to be treated differently. Here is an example of a much clearer approach for our “approvals” example:

Unless expressly set forth otherwise in a particular instance, whenever Landlord’s consent or Tenant’s consent is required by the terms of this Lease, such consent may not be unreasonably withheld, conditioned or delayed.

Fifth, during the time a guarantor controls the obligated entity, it may be reasonable for that guarantor to waive the right to separate notice and to give up the right to consent to changes to a guaranteed lease or other agreement. However, it becomes unreasonable when that control no longer exists. The assumption is that the waived “notice and consent” will come through the controlled entity. So, guarantors should not blithely waive a right to notice and consent once they are no longer in control. That could be when a tenant’s ownership changes or a lease is assigned. In the case we’ve described, the six remaining guarantors were never in control and it would have been reasonable for one or more of them to move away or otherwise leave the church during the term of the lease. They should never have agreed to waive the right to notice and consent. This situation often arises when law firm partners are asked to guarantee a lease or loan. In most of those situations, the partners realize the issue and even negotiate for releases. At a minimum, they should be negotiating for notice and consent rights after other guarantors are no longer involved in the negotiation of later changes to the guaranteed lease or other agreement.

Sixth, “Say What You Mean; Mean What You Say!”

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Comments

  1. Marc Ripp says:

    Dear Ira,

    Skimpy or poorly drafted Guaranty Agreements can raise a host of other similar problems as well. Are the Guarantors liable for the Tenant’s pre-Commencement Date breaches under the Lease that fall outside the Initial Term? Are the Guarantors liable for holdover rent and holdover-related consequential damages that fall outside the Initial Term? If the Guaranty Agreement is silent or unclear on such issues, the Landlord unintentionally may have given the Guarantors a legitimate basis to avoid responsibility.

    Best wishes.

    Regards,

    Marc

  2. Jeremy J. Deeken says:

    A related issue arises when a lease is assigned to and perhaps assumed by a successor tenant. If the lease contains a tenant option to extend, I will, on behalf of the assignor tenant, attempt to get a release of any guarantee liability from the landlord. I don’t believe courts will typically find an option exercised by the assignee (even without consent of the assignor) to trigger a suretyship defense, particularly if the option is at a pre-determined rate which was negotiated between the assignor and landlord. Additionally, when drafting a guarantee on behalf of a guarantor, I will avoid the use of the word “surety” and include language stating that the guarantee is intended solely to serve as a guarantee of collection and not a guarantee of payment – this makes clear that the grantee of the guarantee must first pursue the principal for payment before attempting to collect from the guarantor.

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