Lessons Learned From Recent Decision on Lease Guaranties

May 2010Newsletters In the Zone

A recent New York Supreme Court decision in which the court let the guarantor of a lease off the hook serves as a reminder of the importance of carefully drafting lease guaranties so they will apply to all changes made to the original lease.

In Lo-Ho v. Batista, 881 N.Y.S.2d 33 (A.D. 1 Dept. 2009), a landlord and tenant entered into a commercial lease in which the tenant's obligations were personally guaranteed by the tenant's cousin. The guaranty provided that the guaranty would "remain and continue in full force and effect as to any renewal, change or extension of the Lease." However, while the guaranty covered "any renewal, change or extension of the Lease," the lease itself did not provide for renewal or extension and stated that any holdover would result in an increase in rent but would not itself renew the lease.

When the lease expired, the tenant held over. Thereafter, the landlord and tenant entered into another lease agreement designated as an "Extension of Lease." The extension of lease provided for a substantial increase in rent and real estate tax payments by the tenant as compared to the original lease. When the tenant defaulted under the extension of lease, the landlord sought to enforce the guaranty.

The New York Supreme Court held that the guaranty did not apply to the extension of lease because its terms were too different from the original lease for it to be considered a mere modification or extension. Further, the court found that the new terms and conditions of the extension of lease meant that it was not the type of extension contemplated by the guaranty. According to the court, the increased rent would have substantially changed the guarantor's obligations, and such changes would have required the consent of the guarantor to bind the guarantor by the extension. Thus, the court concluded that the original lease had expired and, since it did not provide for renewal, the extension of lease was actually a completely new lease that was not covered by the terms of the guaranty.

The lesson from this is clear. First, guaranties should be carefully drafted so the guarantor is responsible not only for the original term of the lease but also for any renewal, modification or extension of the term of the lease, even when the rental obligations will be increased and even though the changes to the lease will materially increase the risk of the guarantor. Second, while many lease guaranties contain standard waivers of the guarantor's right to consent to or to receive notice of extensions, amendments and other modifications, landlords should try to obtain the guarantor's consent to any such extensions, amendments or modifications.

For more information, please contact Lauren W. Taylor at 215.918.3625 or [email protected].