Warning: The End of the Lease May Not Mean the End of the Guaranty

Client Alerts · April 19, 2018

Lease guaranties are useful tools when the landlord seeks additional security beyond the tenant’s credit and a security deposit.  In a lease guaranty, a third party, either an individual or a related business entity, agrees to be liable for the tenant’s obligations under the lease.

But what happens to a lease guaranty when the tenant’s obligations end without full payment of the lease obligations?  Does the guarantee automatically terminate because the tenant is no longer obligated?

In a recent Appeals Court case, Cedar-Fieldstone Marketplace, LP v. T.S. Fitness, Inc., the Court held that guarantor was still liable even though the landlord and tenant had settled the lease obligation.

Here, as is often the case, the tenant’s president simultaneously entered into a guaranty to secure the tenant’s performance of its obligations under the lease.  The guaranty was drafted as a separate contract and provided for the guarantor’s liability to continue unless explicitly released by the landlord in writing.

When the tenant defaulted on its payments under the lease, the landlord sought to recover from both the tenant and the individual guarantor.  The tenant and the landlord reached a settlement to satisfy the claim; however, the landlord continued to seek to recover its losses from the guarantor, arguing that the guarantor was not a party to the settlement agreement and thus could still be held liable.  The court ultimately sided with the landlord, rejecting the guarantor’s claim that the guaranty automatically terminated upon satisfaction of the underlying lease claim.  The court held that the lease and the guaranty were separate, stand-alone agreements and the parties were free to negotiate the terms of each document.  Given that the guaranty unambiguously called for the guarantor’s liability to continue, the court ordered the guarantor to pay approximately $50,000 of past due rent.

According to this decision, the lease guaranty is a separate contract between the landlord and the guarantor.  If the lease obligation is settled, the guarantor should be sure that the intention of the parties concerning the guaranty obligations is clearly addressed, and, if appropriate, the guarantor is separately released from the obligations under the guaranty.

If you have any questions about the information presented here, or would to know more about lease guaranties or other real estate transactions, please contact Adamantia Giannakis, the author of this alert, at 617.456.8053 or agiannakis@princelobel.com, or Rob Schlein, the chair of the Real Estate Practice Group, at 617.456.8098 or rschlein@princelobel.com.