Keep Guarantor on Hook if Tenant Holds Over

You probably refuse to rent space to any new and unproven tenant or to a shell company unless it agrees to back its lease with a guaranty. But if the guaranty you accept is like many we've seen, it may severely undercut the protection you'll get from the guaranty.

Here's how you could get hurt: You assume that you're fully protected as long as the tenant is in the space, because the guaranty requires the guarantor to perform the tenant's lease obligations if the tenant defaults either during the lease or any renewal period. But that may not be enough to keep the guarantor on the hook if the tenant holds over—that is, stays in its space—after the initial and renewal periods expire. So, for example, if the tenant refuses to pay the full amount of its holdover rent, you can no longer turn to the guarantor to pay the deficiency. That's a result you probably didn't intend or expect.

Connecticut Owner Gets Hurt

For example, a Connecticut owner accepted a guaranty that said it was a “continuing guaranty” and the guarantor's liability wouldn't be “affected or diminished by reason of any extension of time that may be granted by the Landlord to the Tenant.” But the guaranty didn't address whether the guarantor would remain on the hook during a holdover period. The lease expired in 1992, and the tenant held over for eight more years. The owner increased the holdover rent after May 1995, but the tenant refused to pay the increase. The owner sued the guarantor in 2002 for the deficiency. The guarantor argued that the guaranty ended in 1992 and so it was too late for the owner to sue it for the deficiency.

A Connecticut court ruled that the guaranty had expired in 1992 and that the time limit—or statute of limitations—on making such claims or suing barred the owner's lawsuit. The court said that there was no evidence indicating that the guarantor had consented to remain on the hook during the holdover period. Nor could the owner prove that the parties intended the guarantor to remain on the hook during that period. Also, although a “continuing” guaranty might have an unlimited duration, “it imposes liability on a guarantor only for such a period of time as is reasonable,” said the court. It was unreasonable to assume that any guarantor would agree to accept “liability of indefinite duration and amount,” the court said. So when the lease—and the guaranty—expired in 1992, the owner then had only six years to sue the guarantor, the court said. But it missed that deadline [Tartsinis v. Porter].

Mention Holdover Period in Guaranty

To avoid the same fate as the Connecticut owner, require the tenant to give you a guaranty that remains in effect if the tenant holds over after the lease ends, says New Jersey attorney Marc L. Ripp.

Ripp suggests having the tenant add the following language to the guaranty:

Model Language

If Tenant holds over beyond the term of the Lease, Guarantor's obligations hereunder shall extend and apply with respect to the full and faithful performance and observance of all of the covenants, terms, and conditions of the Lease and of any such modification thereof.

CLLI Source

Marc L. Ripp, Esq.: Counsel, The Gale Company, 100 Campus Dr., Ste. 200, Florham Park, NJ 07932; (973) 301-8057, MRipp@thegalecompany.com.