Lease Guaranty vs. Suretyship: What's the Difference & Why It Matters
There are some tenants that you know will have the assets necessary to pay their rent every month. And then there are the more financially risky ones. When leasing to these businesses, it’s advisable to get a more financially stable third party to sign an agreement backing the tenant’s lease obligations and allowing you to hold it liable in case the tenant defaults. In the business vernacular, such agreements are generally lumped together under the term “guaranty.”
But businesspeople don’t enforce guaranties when defaults occur, judges do. And in the legal realm that judges occupy, the word “guaranty” isn’t a generic term. It’s just one of the kind of arrangements you can use to get a principal to back a tenant’s lease obligations. One alternative arrangement called a “suretyship” offers a different kind of protection that may be more advantageous than a guaranty, depending on the circumstances. So, if you’re not attuned to the differences between a guaranty and a suretyship, you may not be doing enough to protect your financial interests.
Guaranty vs. Suretyship
A commercial lease guaranty is an agreement signed by the landlord, tenant, and a third party who meets the landlord’s standards of financial trustworthiness. In the leasing context, this is usually the corporation(s) that owns or controls the tenant’s business, but it can also be a bank or an individual. A guarantor isn’t obligated to ensure the tenant pays, only to make good on the debt if the tenant fails to do so.
By contrast, a surety is required not simply to backstop but actually perform the lease obligation if the tenant doesn’t. In essence, a surety contracts that a tenant will pay. “If the tenant doesn’t pay, I will” is the essence of the surety agreement. A guarantor warrants merely that the tenant has the financial solvency to meet its payment obligations. “Go after the tenant first and, if it can’t pay, I will” is the essence of the guaranty agreement.
While this distinction may sound like the kind of legal point only a lawyer would care about, it has crucial practical implications if a default occurs. It means that you can’t sue the guarantor until after you exhaust your recourse against the tenant. In other words, to get at the guarantor, you must sue the tenant for default, win the case, and then seek to collect on the judgment. Recourse against a surety is simpler and more direct. Because a surety has the same legal obligations as the tenant, you can sue them both in a single lawsuit. Better yet, you can demand the rent or other lease payment directly from the surety without going to court.
One more important note: It’s not what an agreement is called but what it actually provides for that determines whether it’s a suretyship or guaranty.
The Bankruptcy Twist
Having suretyship co-liability rather than guaranty back-up liability would seem to offer a landlord better protection. But there’s also a potential risk if the tenant files for bankruptcy, as illustrated by a recent case from Illinois. At issue was a Corporate Guaranty signed by Profitt’s, Inc., the parent of shopping center tenant Carson’s, stating:
Guarantor hereby covenants and agrees to and with Landlord that if default shall at any time be made by Tenant in the payment of any such rent or other sums or charges payable by Tenant under the Lease or in the performance of any of the covenants, terms, conditions or agreements contained in the Lease, Guarantor will forthwith pay such rent or other sums or charges to Landlord, and any arrears thereof, and will forthwith faithfully perform and fulfill all of such covenants, terms, conditions and agreements, and will forthwith pay to Landlord all damages and all costs and expenses that may arise in consequence of any default by Guarantor hereunder (including, without limitation, all reasonable attorneys' fees incurred by Landlord or caused by any such default and/or by the enforcement of this Guaranty).
However, the next paragraph contained the following clause:
This Guaranty is an absolute and unconditional guaranty of payment (and not of collection) and of performance and is a surety agreement. Guarantor's liability hereunder is direct and may be enforced without Landlord being required to resort to any other right, remedy or security and this Guaranty shall be enforceable against Guarantor, without the necessity for any suit or proceedings on Landlord's part of any kind or nature whatsoever against Tenant, and without the necessity of any notice of non-payment, non-performance or non-observance or the continuance of any such default or of any notice of acceptance of this Guaranty or of Landlord's intention to act in reliance hereon or of any other notice or demand to which Guarantor might otherwise be entitled, all of which Guarantor hereby expressly waives; and Guarantor hereby expressly agrees that the validity of this Guaranty and the obligations of Guarantor hereunder shall in nowise be terminated, affected or impaired by reason of the assertion or the failure to assert by Landlord against Tenant, of any of the rights or remedies reserved to Landlord pursuant to the provisions of the Lease.
Carson’s stopped paying rent after its immediate owner, Bon-Ton Stores, filed for bankruptcy. Carson’s rejected the lease in the bankruptcy, thus freeing itself of any further liabilities under the lease. So, the landlord went after Saks, which had assumed the Corporate Guaranty from Profitt’s. Saks claimed that it was a surety with the same liabilities as Carson’s. And since Carson’s had rejected the lease, those liabilities were now discharged and Saks was off the hook.
But the Illinois federal court didn’t buy it, finding that the Corporate Guaranty was clearly a lease guaranty. “To argue that a tenant’s release [in bankruptcy] somehow releases the guarantor from an obligation to pay rent due completely misstates the role of the guarantor under the clear terms” of the Corporate Guaranty, the court explained. The whole point of having a guarantor was to protect the landlord in case the tenant couldn’t make required payments. The fact that it also designated Saks as a surety and conferred extra benefits to the landlord was irrelevant and didn’t “alter Saks’ obligations to perform as a guarantor under the clear and unambiguous language of the contract” [WEC 98C-4 LLC v. Saks Inc., 2021 U.S. Dist. LEXIS 219008].
The Saks case might have had a different outcome had the guaranty agreement been framed solely as a suretyship. By making it both a guaranty and a suretyship, the landlord got the best of both worlds. In other words, the court in this case didn’t rule that the guaranty and surety language canceled each other out but instead gave sway to the clear intentions of the landlord to get financial assurance in case the tenant didn’t pay rent. However, you can’t be sure that a court reading your own agreement would rule likewise. So, you need to talk to an attorney before emulating the two-for-one strategy.