- Watch Your Language With Commercial Lease Guarantees
- February 20, 2015
- Law Firm: Kohrman Jackson Krantz PLL - Cleveland Office
As established in other “Watch Your Language” articles for this Blog, as a general rule, courts will uphold language in a commercial lease (and ancillary lease documents such as assignments and guarantees), unless it is contrary to statutory law or public policy. Because of this judicial deference to lease language, you must say what you mean, precisely, or a judge will decide what you meant. Failure to follow this axiom left the landlord in Brogan v. Coughlin Servs., Inc., 2014-Ohio-469 (10th Dist. Ct. of Appeals, Franklin County) without an enforceable guarantee.
In Brogan, SES Realty Co. ("SES"), as landlord, entered into a lease agreement with Coughlin Services, Inc. ("Coughlin Services"), as tenant, for property located on Schrock Road in Columbus, Ohio. Albert and Melody Coughlin, the appellees signed a "guaranty of lease" agreement ("guaranty"). The guaranty was a "continuing guaranty," not to be affected "by reason of any extension of time that may be granted by the Landlord to the Tenant." There were a number of lease extensions (4) between the original landlord and tenant. Thereafter, Coughlin Services (the original tenant) sold its business and assigned its tenant rights under the lease to a company we’ll call “Assignee A,” who subsequently assigned the lease to “Assignee B”. Meanwhile, SES sold the building (and assigned landlord’s rights under the lease to the plaintiff-appellants, Sean and Barbara Brogan. When the Brogan’s tenant (Assignee B) defaulted, the Brogans attempted to collect on the Guaranty originally given by the Coughlins. The Coughlins refused to pay on the Guaranty and the Brogans sued. The trial court found that the Guaranty was unenforceable, at least against the Coughlins, and the Brogans then appealed to the 10th Dist. Ct. of Appeals.
The Coughlin Guaranty, provided, in pertinent part: “[the Coughlins] shall guarantee the performance by Tenant, its personal representatives, successors and assigns, of all covenants and conditions of the Lease Agreement to be performed by Tenant."
The appellants (the Brogans) argued that the personal guaranty of appellee Coughlin remained in full force and effect until the expiration of the term of the lease which, by virtue of amendment, was still a year away (from the filing date of the lawsuit). Even though there were two assignments of the lease, the appellants used prior case law that established the lessee "is still in privity of contract with the original lessor" and the assignment "does not relieve the lessee of its express obligation to pay rent “.
Appellees, on the other hand, argued they had only promised to guarantee the lease obligations of Coughlin Services, as tenant, and such tenant's heirs, personal representatives, successors or assignees, namely, Assignee A. Assignee B was not an assignee of the tenant (Coughlin Services), but an assignee of Assignee A..
The 10th District Court of Appeals upheld the trial court’s decision in favor of the appellees (the Coughlins). In reaching its decision, the court first cited prior case law (including decisions of the Ohio Supreme Court) reinforcing our “Watch Your Language” principle; namely that "[i]n construing the terms of a written contract, the primary objective is to give effect to the intent of the parties, which we presume rests in the language that they have chosen to employ." The court then reasoned since Ohio courts "construe guaranties, and releases thereof, in the same manner as they interpret other contracts,” their job would be simply to interpret the guaranty language.
In considering the terms of the guaranty, both the trial court and the appellate court found the language to be "clear and unambiguous," and that "Coughlin's obligation to [appellants] for delinquent rent is only triggered by his default as the tenant under the original Lease or the default of Coughlin's heirs, personal representatives, successors or assigns." In other words, the guaranty only guaranteed performance of the tenant and the tenant’s assignee (Assignee A), not the assignee of tenant’s assignee (Assignee B). The 10th district further distinguished this case from the case argued by the appellees (Morse & Hamilton Ltd. Partnership v. Gourmet Bagel Co., 10th Dist. No. 99AP-1253 (Sept. 29, 2000). “While Gourmet Bagel addresses the relationship between a lessor and lessee following an assignment under a lease agreement, that case does not deal with a guarantor relationship such as the present.”
What is the moral of this story? Presumably, the original landlord intended for the Coughlins to guaranty the tenant’s performance, as well as the performance of all assignees down the line. Certainly, the Brogans thought their guaranty would be enforceable against all assignees. However, the guaranty, according to the court, did not grant the landlord (and the landlord’s assignees) such rights. In other words, “Say what you mean, precisely, or a judge will tell you want you meant.” Ohio commercial contract cases are replete with their own warnings to “watch your language.” As aptly stated by the 2nd District Court of Appeals (regarding guarantees) in a recent 2013 decision: "It is well established in Ohio law that a guarantor is only bound by the precise words of his contract." As a result of these cases, guarantees must specifically provide for whose obligations are being guaranteed, not just “the what”.