Keep Guarantor Liable for Tenant’s Renewal and Holdover Defaults
In many states, the lease guaranty ends when the underlying lease ends. So, unless there’s language to the contrary, the guarantor is off the hook if the tenant holds over after the end of the term or renews the lease. That leaves you holding the bag for any tenant defaults that occur during the holdover or renewal term. The good news is that as long as you’re aware of this loophole, you can easily plug it by including the right language in the guaranty agreement.
Arizona Guarantor Not Liable for Tenant’s Failure to Pay Renewal Rent
An Arizona case is a good illustration of how landlords can get burned by not including protective language in a guaranty. The tenant held over, then renewed its lease but failed to pay any rent during the renewal period. The landlord then sued the guarantor under the tenant’s original lease. But the Arizona court wouldn’t have it, ruling that the end of the original lease extinguished the guarantor’s liability. A guaranty doesn’t continue into a renewal or extension term, the court explained, unless:
- The guaranty says it does; or
- The lease says that any term that starts after the initial term is a continuation of the original lease.
Since neither thing was true in this case, the landlord was out of luck [The Westcor Company Limited Partnership v. Bryant Pickering, 794 P 2d 154].
Alabama Guarantor Is Liable for Tenant’s Failure to Pay Renewal Rent
An Alabama landlord that did plug this loophole had far better results. The facts were pretty much the same as in the Arizona case. A shopping center tenant held over for a month before signing a lease renewal agreement. The tenant didn’t pay the renewal rent, and the landlord took the guarantor to court. But this time, the landlord won. The key difference: The guaranty in this case stated that it was a continuing obligation and that any lease modification, extension, or renewal would not end the guarantor’s liability. As a result, the court held the guarantor liable for the tenant’s failure to pay renewal rent [D.J. Schrader v. The Mall, Inc., 548 So. 2d 1353].
Include Language Holding Guarantor Liable Past Original Lease Term
A guarantor’s liability doesn’t automatically continue when the original lease term ends. You must add language to the guaranty to keep the guarantor on the hook. Ask your attorney to adapt this sample language based on your own circumstances:
If the Lease term is extended for any period beyond the original termination date specified in the Lease, whether due to renewal, extension, holdover, or any other cause, or if the Lease is modified in any way, the obligations of Guarantor hereunder shall apply and extend with respect to the full performance and observance of all of the covenants, terms, and conditions of the Lease, as existing, extended, renewed, or modified and of any such amendment thereof.