Good Guy Guaranties and Lease Renewals, Extensions, and Modifications
June 2, 2017
June 1, 2017 – We have finished our submission for the next edition of the New York State Bar Association Commercial Leasing Manual. Below is an excerpt.
VII. LEASE RENEWALS, EXTENSIONS, AND MODIFICATIONS
The scenario we examine in this section is the following: landlord, tenant, and guarantor have already entered into a lease and a GG Guaranty, respectively. Subsequently the parties agree to another set of terms embodied in either a lease renewal or extension at the expiration of the term, or a lease modification, amending certain rights and obligations of the parties.
Query: Does the GG Guaranty still bind the guarantor? It depends.
The Presumption: Courts construe guaranties strictly in favor of private guarantors. Levine v. Segal, 256 A.D.2d 199, 200 (1st Dept. 1998). If a guaranty is silent as to its effect in light of a renewal or other subsequent agreement between the landlord and tenant, courts will not extend the guaranty’s enforceability beyond the original agreement. Trump Management Inc. v. Tuberman, 163 Misc.2d 921 (Kings Co. Civ. Ct. 1995) citing Gulf Oil Corp. v Buram Realty Co., 11 N.Y. 2d 223 (1962).
A. SURVIVAL CLAUSES
One way to ensure that the GG Guaranty still binds the guarantor after a subsequent agreement between the landlord and the tenant is to include a survival clause in the original GG Guaranty. We previewed this clause at the top of the course when we covered the anatomy of a GG Guaranty. The following is sample language for a survival clause in its entirety:
This Guaranty shall be a continuing Guaranty, and the liability of Guarantor hereunder shall in no way be affected, modified or diminished by reason of (a) any assignment, renewal, modification, amendment or extension of the Lease, or (b) any modification or waiver of or change in any terms, covenants and conditions of the Lease, or (c) any extension of time that may be granted by Landlord to Tenant, (d) any consent, release, indulgence or other action, inaction or omission under or in respect of the Lease, or (e) any dealings or transactions or matter or thing occurring between Landlord and Tenant, or (f) any bankruptcy, insolvency, reorganization, liquidation, arrangement, assignment for the benefit of creditors, receivership, trusteeship or similar proceeding affecting Tenant, whether or not notice thereof or of any thereof is given to Guarantor.
First, note that this is a harsh example of a survival clause because the guaranty even survives an assignment. From the guarantor’s perspective, it does not want to be on the hook even after a new business (and presumably new principals), have taken over. Guarantor should negotiate that upon assignment, a suitable guarantor of equal or greater financial net worth assume the guaranty and release the original guarantor.
This survival clause errs on the safe side to say the least. The draftsman of this clause was clearly aware of the situations that can arise which may well defeat a GG Guaranty’s survival clause because its language fails to contemplate the contingency at hand.
The following cases illustrate how (1) a survival clause can fail to keep the guarantor on the hook, and (2) how changes to material terms of a lease may require a showing that guarantor consented to the changes.
1. New Agreement
In these cases, the operative fact was that the guaranty’s survival clause did not contemplate the kind of arrangement that the landlord and tenant’s subsequent agreement embodied, i.e. the guaranty was inextricably tied to the original lease and its terms.
Where a guaranty executed in 2000 stated that it would “remain and continue in full force and effect as to any renewal, change or extension of the Lease,” the language was held not to cover an “extension agreement” between landlord and tenant that, inter alia, (1) specifically referred to the 2000 lease as “expired” and, (2) materially altered the terms of the 2000 lease by increasing rent for the tenant, and thus, increasing the risk for the guarantor without his consent. Lo-Ho LLC v. Batista, 62 A.D.3d 558 (1st Dept. 2009).
Where a guaranty stated that it would “remain and continue in full force and effect as to any renewal, change or extension of the Lease”, and tenant stayed on as a month-to-month tenant after the expiration of the term, the court held that the guaranty no longer applied, because there hadn’t been a renewal or extension of the lease. 665-75 Eleventh Ave. Realty Corp. v. Schlanger, 265 A.D.2d 270 (1st Dept. 1999).
2. Material Terms of the Original Lease Have Changed
A creditor (landlord) and debtor (tenant) cannot materially alter the terms of an agreement that a surety (guarantor) is bound to without the surety’s (guarantor’s) consent.
Where a modification agreement increased rent, which was a material term, but guarantor could not make a prima facie showing that it did not consent to modification, summary judgment dismissing counts against guarantor was not warranted. Arlona Ltd. Partnership v. The 8th of January Corp., 50 A.D.3d 933 (2nd Dept. 2008); cf. 404 Park Partners, L.P. v. Lerner, 75 A.D.3d 481 (1st Dept. 2010) (reversing trial court’s grant of summary judgment to plaintiff and remanding for trial, where a guarantor did not sign the second guaranty executed with a lease extension and issue of fact remained as to whether he consented).
Where a lease renewal agreement changed a material term of the lease by granting landlord a right to terminate the lease unilaterally, without qualification, in the event of a use violation placed on the premises, the guarantors were discharged of their obligation because they had not consented to the change in their individual capacity. Mangold v. Keip, 177 Misc.2d 953 (App. Term. 1st Dept. 1998).
B. WAIVER OF NOTICE OR RATIFICATION
There are two ways to avoid the issue of showing that a guarantor consented to a “material” change in a lease modification, renewal, or extension.
1. Guarantor Waives Notice
Where the original guaranty includes a provision in which guarantor expressly waives his right to receive notice of changes to the lease, the guaranty is not extinguished simply because material changes to the lease were made without giving notice to the guarantor. Pamela Equities Corp. v. The Law Suite, L.P., 14 Misc.3d 1217(A) (N.Y. Sup. Ct. 2005).
2. Ratification of Guaranty
Where guarantors execute a ratification or reaffirmation of the guaranty and acknowledge their assent to any material changes in the terms of the original contract, courts will hold guarantors liable. See e.g., North Hill Funding of New York, LLC v. Maiden & Madison Holdings, LLC, 27 Misc. 3d 1232(A) (N.Y. Sup. Ct. New York County 2010)
PRACTICE TIP: The best practice is to have the guarantor(s) sign a ratification of the guaranty anytime the underlying agreement is in anyway modified, renewed, or extended irrespective of whether you may consider the change to be a “material” term.
3. Continuing the Guarantor Relationship
Someone who seemed to be a solid guarantor at the inception of a lease may later fall into insolvency for any number of reasons. E.g. halfway through a five year contract term, if the guarantor faces litigation and is subject to a $1.5 million money judgment that wipes out its assets, obligee will be left holding the bag if the guarantor’s business is the next thing to fold. In that case, you may decide that you will only continue the relationship if the guarantor posts additional security or obtains a letter of credit from a bank.