Termination Agreement Didn't Extinguish Tenant's Guaranty Obligations

Facts: As part of its lease for space in a shopping center, a retail tenant signed a guaranty, in which the tenant personally guaranteed payment of rent in the event that the business couldn’t pay. The tenant later encountered financial difficulties and fell behind on its rent. The owner agreed to sign a termination agreement with the tenant, ending the lease.

When the owner tried to collect the back rent and associated fees from the tenant under its personal guaranty, the tenant claimed the termination agreement has extinguished its liability for rent under the lease and the guaranty, letting it off the hook for any of the owner’s financial damages.

The owner sued the tenant in its personal capacity to enforce the guaranty. The tenant asked a district court for a judgment in its favor without a trial. The district court ruled that a trial was necessary. A jury determined that the termination agreement didn’t extinguish the tenant’s obligations. It awarded the owner over $126,000 in unpaid rent. The tenant appealed, but the district court denied the request. The tenant appealed again.

Decision: A North Carolina appeals court upheld the district court’s decision.

Reasoning: On appeal, the tenant asserted that the termination agreement clearly and unambiguously ended its obligations under the guaranty. The appeals court disagreed. It noted that the termination agreement provided specifically that “neither landlord nor tenant shall have any further duties, obligations, or liabilities under the Lease from and after the Termination Date.” But the guaranty wasn’t mentioned.

Further, various provisions of the guaranty provided that the tenant’s liability as guarantor would survive an event such as a lease termination and specified that the guaranty was a “continuing guaranty,” meaning that the liability of the guarantor wouldn’t be affected, modified, or diminished by any dealings or transactions between the owner and tenant—including a termination of the lease.

The appeals court ruled that, while the tenant was released from its obligation under the lease for rent accrued after the termination, as a guarantor it remained liable for past-due rent.

• BV Retail, LLC v. Donnelly, September 2014