Does Lease Termination Let Rent Guarantor Off the Hook?
SITUATION: A tenant leases restaurant space with its principal acting as guarantor. Under the guaranty agreement, the landlord is allowed to show the tenant leniency and make lease modifications, extensions, or amendments with the tenant without notifying the guarantor. The guarantor’s obligations, the agreement concludes, “shall be extensive with and shall remain in effect as long as Tenant’s obligations in and under said Lease, and all extensions or modifications thereof shall continue, and as long as said Tenant shall be liable Guarantor shall be liable thereunder in the same manner and in the same effect.”
Six months later, the restaurant is in default. The sides enter into an agreement in which the landlord acknowledges that the lease is terminated and releases the tenant from all lease obligations. The landlord doesn’t notify the guarantor, who has since divested his ownership interest in the restaurant. The landlord also includes a provision expressly stating that the termination agreement doesn’t release or bar its right to proceed against the guarantor under the guaranty. And that’s just what the landlord does.
QUESTION: Is the guarantor still on the hook for the tenant’s default?
A. No, because by releasing the tenant, the landlord also released the guarantor.
B. Yes, because the guaranty allows the landlord to show the tenant leniency.
C. No, because the guarantor no longer owns the tenant.
D. Yes, because the termination agreement expressly says the guarantor isn’t released.
ANSWER: A. The guarantor is no longer liable because the termination agreement extinguished his liability.
EXPLANATION: The landlord in this case was keenly aware of how making subsequent arrangements with tenants can inadvertently let a guarantor off the hook. The irony is that it still fell into the trap despite painstaking efforts to avoid it. The miscalculation stemmed from the language saying the guarantor’s obligations ran with and extended as long as the tenant’s did. While this gave the landlord maximum leeway to modify the tenant’s lease obligations in lease revisions without notifying the guarantor, it didn’t allow for terminating those obligations. On the contrary, since the guarantor’s guaranty obligations and the tenant’s lease obligations were coterminous, releasing the tenant had the effect of releasing the guarantor. So, A is the right answer.
WHY WRONG ANSWERS ARE WRONG:
B is wrong because the landlord didn’t just show the tenant leniency in meeting its lease obligations; it released the tenant from those obligations altogether. And in ending the lease, the landlord also extinguished the guarantor’s obligations under the rental guaranty.
C is wrong because the guarantor’s obligations were in no way contingent on his still being the tenant’s owner.
D is wrong because the statement purporting to make the guarantor still liable after the lease terminated violated the terms of the guaranty agreement. In other words, the guaranty said that the guarantor’s liability would survive revisions to the tenant’s lease obligations but not their termination.
TAKEAWAY: Guaranty may not survive lease termination.
Don’t misread a rental guaranty provision that allows you to extend, renew, or modify a tenant’s lease obligation without discharging the guarantor as meaning that you can proceed against the guarantor after releasing the tenant from the underlying rent payment obligation altogether.