• Lease Guarantors Not Liable For Extended Term
  • September 30, 2003 | Author: Harris Ominsky
  • Law Firm: Blank Rome LLP - Philadelphia Office
  • If a lease guarantor has not agreed to extending the term of a lease, it may not be liable for the tenant's failure to pay rent during the extended term. This issue arose in the case of McIntyre Square Assocs. v. Evans, PICS Case No. C03-0824 (Pa. Super. May 30, 2003), in which the Pennsylvania Superior Court found that the trial court had erred in finding that the guarantors under the guaranty agreement had consented to material modifications of the lease.

    The landlord and the tenant had entered into a five-year term, and then extended the lease for an additional five years and significantly increased the rent. Since the guarantors had never specifically approved the extended term, they argued that they were not bound as guarantors for the tenant's obligations under the extended term because that extension materially increased their risk under the guaranty. In addition, the guarantors argued that the "Lease Amendment and Extension Agreement" contained terms that were so different from the original lease that it constituted a wholly new, second lease to which the guaranty agreement did not apply.

    Guaranty Language

    The dispute centered around the language in the guaranty which stated that the liability of the guarantors shall not be impaired, released, terminated or discharged by various actions in connection with the lease "notwithstanding that the same are made with or without notice to the Guarantor." Among those items to which the guarantor agreed were the following:

    "(a) any amendment or modification of the provisions of the lease agreement;" and

    "(e) any act, thing, omission or delay to do any act or thing that may, in any manner, or to any extent vary the risk of Guarantor or that would otherwise operate as a discharge of any Guarantor as a matter of law."

    Two of the three judges on the Superior Court panel reversed the lower court and supported the guarantors' arguments that the "guaranty language" was ambiguous. According to the court, that language did not clearly provide that the guarantors had given their consent to a five-year lease extension.

    The court held that subsection (a) of the guaranty which permitted "any amendment or modification" was ineffective to bind the guarantors because it says nothing about modifications that increase a guarantor's risk as required under earlier cases.

    In addition, the quoted subsection (e) did not bind the guarantors to the extension, even though they consented to any act or thing that may "vary the risk of Guarantor," because of the qualifying language at the end of this phrase. That language was, "or that would otherwise operate as a discharge of any Guarantor as a matter of law."

    The court read that extra phrase "otherwise" as "in a different manner; in another way, or in other ways." It stated: "This meaning, when inserted into subpart (e) reads 'any act, thing, omission or the right to do any act or thing that may in any manner, or to any extent, vary the risk of Guarantor or that would in a different manner operate as a discharge of any Guarantor as a matter of law.'" "Read this way, the entire phrase appears to refer to any condition that discharges a guarantor as a matter of law, one way or another. In the narrowest sense, this may refer to errors of procedure that might extinguish a Guarantor's obligations under the agreement. In the broadest sense, this phrase could be seen as an attempt to eliminate any defense or argument that would relieve Guarantors of liability as, in some sense, application of any legal principle to the interpretation of a contract that thereby releases a party 'operates as a discharge through that as a matter of law.'"

    Dissent

    Judge Graci dissented with the majority's disposition on this issue because he did not agree that section (e) of the guaranty agreement created an ambiguity about whether or not the guarantors consented to material modifications in the lease that increased their risk. Judge Graci then concluded that the guarantors were not discharged: "The liability of the Guarantors shall not be discharged, under the terms of the agreement, even though as a matter of law, in the absence of such clause in the agreement, they 'otherwise' or 'in a different manner' would be discharged."

    Judge Graci then went on to analyze the guarantors' argument that they should not be liable because the material changes in the lease constituted "a new and different lease for which the Guarantors in the first lease are not liable." He rejected that argument because the caption of the modifying document itself clearly and unambiguously indicated that it is a "Lease Amendment and Extension Agreement," not a new and different lease agreement, and by its terms that agreement amended the original agreement and provided that all other terms, provisions and conditions of the original agreement that were not amended should remain in full force and were ratified and confirmed by the parties. The amendment also set rent during the extended term for the sixth through the tenth Lease Year, which also indicated that the parties did not intend the five-year extension to be a new lease.

    The lesson to landlords from all of this is clear. First, guaranties should make it clear that the guarantor is responsible not only for the original term, but also for any extension of the term of the lease, even when the rental obligations will be increased by that extension, and even though the changes to the lease will materially increase the risk of the guarantor. Second, if the landlord intends to depend in any way on the guaranty, it should not agree to extend the term of a lease without obtaining the guarantor's specific consent to that extension.