How Good Is A Lease Guaranty After The Original Term Expires?

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It’s a funny thing about this business. After all is said and done, you still need to know the “law.” And, by “law,” we aren’t thinking about the “law in general.” Instead, we are thinking about the “law” in the place where it matters. Almost always, that’s the state where the property in question is located. In today’s world, it’s not possible to know everything, everywhere. But, what is possible is to know the “questions.” There are some universal concepts. Not all of those concepts are universal, fixed rules such as the rule that if valid rent is unpaid, the tenant can’t stay. The most important universal concept is that the law is not the same throughout the more than 51 jurisdictions that make up the United States. In most cases, the law is similar, but the law is not the same. As with many “learned professions,” knowing the questions to ask is the hard part. That’s the real challenge we face. Finding answers is easy. Said another way, if you want to have your agreements, such as leases and guaranties, mean what you have said, then you have to be aware of the way the law differs jurisdiction to jurisdiction.

Generally speaking, differences in “public policy” explain why states differ, one from another, when it comes to “law.” They have different “senses” when it comes to whether a person should have “liability.” By example, how they approach a “guaranty” depends on whether the state has a contractarian philosophy or falls in the paternalistic school. How often have we all seen the following language in a lease guaranty: “… this guaranty shall remain for the renewal, modification, extension or waiver of this Lease”? [Yes, this isn’t the “best” way to say that, but the writing style or grammar used did not change the result of the story we are about to tell.]

Here’s the story we found in a recent court decision. We’re not sure how much of the subject lease’s history matters beyond knowing that it involves a certain tenant with a 3- year lease with a single, 3- year renewal option and that the option was exercised. Nevertheless, we’ll ramble on. The lease was signed in 1998. It was modified in 1999 to increase the size of the leased space and to raise the rent accordingly. In 2001, the 3- year option was extended to 5- years. This enhanced option was exercised, thereby taking the term until 2006. In 2006, the lease was again amended, with a corresponding rent increase, to extend the term until 2009. In 2008, the lease term was again extended, this time to 2014. Interestingly, but of no consequence to the outcome declared by a Florida District Court of Appeal, the tenant did not sign any of the described “modifications.”

So, to recap: the original lease was for three years. Subsequently, the floor area of the leased space and the rent for that space was increased. The tenant exercised an original renewal option that added three years to the lease term. That took the “original” deal to 2004 (or 2006 if you consider the amended option provision part of the “original” lease). By way of further lease amendments or extensions, the lease term was extended until 2014, essentially 10 years beyond the expiration date originally provided for when the lease was first signed.

Now, as every reader rightly suspects, the tenant stopped paying rent (in 2012) and the landlord went after the guarantor. After all, the guaranty covered all of those renewals, modifications, and extensions. Right?

Well, not exactly (according to the court in a decision that can be read in its entirety by clicking: HERE).

We’ll tell you “why” before we (try to) explain. Better yet, here’s how the court put it:

We find that the plain language of the lease governs. The guaranty refers to the lease, which has a term of three years with “an option to renew this Lease for one (1) additional three (3) year term.” The guaranty was limited to the term of the lease and its solitary three-year option to renew. Thus, the guaranty was not a continuing guaranty.

The key words in the indented statement are: “continuing guaranty.” Perhaps, we should have described them as “magic words” because an (earlier) 2008 court decision told all who should know (that’s us), that:

[u]nder Florida law, a guaranty for a lease can be continuing, but it must expressly state that it is intended to cover future transactions for the guarantor to be liable for extensions and renewals.

And, in a 1979 decision, that:

[a] guaranty is continuing if it contemplates a future course of dealing during an indefinite period, or if it is intended to cover a series of transactions or succession of credits, or if its purpose is to give to the principal-debtor a standing credit to be used by it from time to time. Thus, a continuing guaranty covers all transactions, including those arising in the future, which are within the description of contemplation of the agreement.

Basically, the guaranty did not expressly state that it was intended to cover future transactions. Frankly, Ruminations doesn’t understand the court’s thinking unless it lives in a world of form over function. If we were to attack the way the guaranty tried to express itself when it came to term extensions or lease modifications, we could have attacked the way the words were crafted even though their intent seems pretty clear. But, while we get to opine, we don’t get to “rule.” That’s why there are courts and judges. And, here’s how this particular court dealt with the “renewal, modification, extension or waiver” text:

Reading the guaranty in pari materia with the lease does not alter the fact that the lease applied to a three-year term with a single, three-year renewal. Any “renewal, modification, extension or waiver” would be limited by the parameters of the term of the lease and its option to renew. Because the guaranty referenced this particular lease, the guaranty was limited by the terms of the original lease. Further, the guaranty did not meet the definition of a continuing guaranty because it did not “expressly state that it is intended to cover future transactions.” … Nor did the guaranty “contemplate[] a future course of dealing during an indefinite period, or . . . cover a series of transactions”; rather, the guaranty operated for the finite period of time delineated in the original lease.

Now, do our opening words resonate with our readers? Yes, the general principles of lease guaranties apply throughout the United States, but we all need to remember that “guaranties” (as with remedies, mechanics’ liens, etc.) are “special.” They implicate “public policy” and, as we wrote above, some jurisdictions lean toward the “contractarian” school of thought, while others lean toward the “paternalistic” school of thought. So, how does one work in such an environment?

First and foremost, we all need to be humble and know what we don’t know. We have to know the questions. And, we have to know where to find the answers. If we are going to ply our trade in a jurisdiction where we don’t solidly know the law (and that even could be the one where we actually work from), then we need to have a relationship with someone who knows the law of that jurisdiction. It isn’t intuitive. Also, we need to read more than just Ruminations. Trade and bar association membership can be valuable, but only if we take advantage of what those organizations offer. Deleting their emails and putting their newsletters in a pile never to be read are lost opportunities. Seminars, webcasts.

And, here is one more source. Though its editor Mark Senn is a good friend, he’s never asked us to tout his excellent two-volume book published by Wolters Kluwer: State-by-State Guide to Commercial Real Estate Leases. It isn’t a substitute for hearing from a qualified attorney licensed in the subject jurisdiction, but it can help with formulating our questions. It covers complicated topics as well as mundane ones (such as how many signatures are needed for enforceability). [It doesn’t, yet, explain this Florida “twist” on guaranties.] Yes, it is expensive, but it is well worth it – it is extremely valuable. Craftspeople have the right tools in their toolboxes. This book is in ours. No, we don’t get paid to recommend this treatise.

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Comments

  1. Peter Anderson says:

    Excellent reminder of why the guarantor should be a party to all ongoing documents and agreements. Good tip about Mark’s book as well (is his choice of footwear mentioned at any point in the book?). As a Canadian lawyer, my reciprocal pitch would be Richard Olson’s ‘A Commercial Tenancy Handbook’ published by Carswell. It is a bit British Columbia heavy, but Richard also summarizes the law of other provinces.

  2. Tim Scott says:

    Late to this party but a note: “… this guaranty shall remain for the renewal, modification, extension or waiver of this Lease” Would the FL court have ruled it a Continuing Guaranty if the only change were to change it to “all renewals, modifications, extensions …” Cali Courts have vacillated from purely anti-guaranty to contractarian. For quite a while now it has been the latter, but we still have 6 page or more guarantees laying all the groundwork and using all the magic language. I would almost expect a Cali court to look at “the” and conclude it refers to the specific documented extension and that it would be loathe to enforce the guaranty more than 6 years out. After all, the Landlord controlled the writing and controlled under what circumstances and with what signatures he would further amend and extend the lease. Think of Cali courts as the paternal contractarians.

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