By Patrick McCormick
For obvious reasons, commercial landlords routinely insist that a commercial tenant provide a personal guaranty of the payment and performance obligations of the tenant.
It is not surprising that litigation often arises between the landlord and the guarantor upon the default by the tenant with a common defense being that the terms of the guaranty were not intended to cover the specific default at issue.
The general rule is that a personal guaranty is to be strictly construed and a “guarantor should not be bound beyond the express terms of his guarantee.”[i] As a result, to help ensure maximum security, it is common for landlords to require that a guaranty provide that it is applicable to any “renewal, change or extension of the Lease.” Despite such broad language, there is much litigation over whether the particular guaranty is enforceable when leases are renewed, extended or changed.
In Commerce Street Professional Center, LLC v. Connolly,[ii] plaintiff and landlord entered into a commercial lease with a stated term commencing March 1, 2006 and expiring February 28, 2013. The lease was personally guaranteed by the tenant’s president and also by the defendant Connolly. On April 10, 2008, landlord and tenant executed an “Extended and Modified Lease Agreement” under which tenant leased additional space, extended the term by two years, increased the rent, and changed the security provision of the initial lease agreement. This extension agreement was guaranteed by the tenant’s president, but not by defendant Connolly, who had no involvement in negotiating the extension and who did not sign the extension. The tenant defaulted on February 27, 2014—during the extension period. Landlord commenced an action against Connolly, alleging that his guaranty of the original lease was applicable to the extension agreement. Defendant Connolly moved to dismiss arguing, among other things, that the extension agreement materially altered the terms of the original lease including extending the term and increasing the rent and therefore “impermissibly increased his obligation as a guarantor without his consent.” Applying the above stated rule and the proposition that a “guaranty of a tenant’s obligation under a lease must be strictly interpreted in order to assure its consistency with the lease terms to which the guarantor actually consented,” the Court granted the motion to dismiss. Simply stated, the Court found that the extension agreement contained terms to which Connolly did not consent and to which he did not intend to be bound and, because it materially differed from the original lease, it was “not an extension of the original lease dated March 2006 which would allow plaintiff to recover from defendant.”
A similar result was reached in 665-75 Eleventh Avenue Realty Corp. v. Schlanger.[iii] In that case, the landlord obtained judgments against the tenant that were unsatisfied and thereafter commenced an action against the guarantor. The written commercial lease at issue was entered into on October 13, 1987 and by its terms expired October 31, 1992. The defendant Schlanger, the president of the corporate tenant, executed a personal guaranty that provided that “the Guarantor further agrees that this guaranty shall remain and continue in full force and effect as to any renewal, change or extension of the Lease.” After the expiration of the term of the lease, the landlord and tenant entered into written extensions of the lease with the final extension dated June 1995, extending the lease to June 30, 1995. The tenant remained in possession after June 30, 1995 as a month-to-month tenant and paid rent for three months, but then stopped paying rent. Landlord commenced a nonpayment proceeding against the tenant and was awarded a money judgment. The landlord then commenced this action against the guarantor to collect the rent owed as set forth in the judgment. In affirming the denial of the landlord’s motion for summary judgment, the Appellate Division, applying the above stated general rule that personal guarantees are to be “strictly construed in favor of a private guarantor,” held that “since it is undisputed that there was no written lease extension beyond June 10, 1995, the guaranty lapsed, releasing the defendant from liability under the lease.”
While the factual differences between these two cases are obvious, what is troubling about Schlanger is that the Court did not address whether the guarantor (the tenant’s president) was aware that the tenant held over after the expiration of the final extension period and what impact this may have had on the Court’s determination. This leaves one to wonder if the outcome would have been different had the guaranty also provided that is was applicable to any holdover period or any period when the tenant became a month-to-month tenant.
These cases, and there are many others, lead to the conclusion that landlords should be diligent in obtaining the guarantor’s written consent to every change, renewal, extension, modification, or alteration of any term in a commercial lease and should seek the broadest possible guaranty.
[i] Wesselman v. Engel Co., 309 N.Y. 27 (1955).
[ii] Commerce Street Professional Center, LLC v. Connolly, 2014 WL 5739931 (Sup. Ct., Westchester Co. Giacomo, J.).
[iii] 665-75 Eleventh Avenue Realty Corp. v. Schlanger, 265 A.D.2d 270 (1st Dep’t 1999)