• Know What You Are Guaranteeing Before Becoming a Guarantor
  • August 26, 2011
  • Law Firm: Buckingham, Doolittle & Burroughs, LLP - Akron Office
  • The use of a guarantee for a commercial lease is sometimes employed when a landlord seeks additional recourse to secure payment of rent in the event of a default under the lease. As illustrated by a recent appellate decision by the Ohio Fifth District Court of Appeals in Strip Delaware L.L.C. v. Landry’s Restaurants, Inc., et al. (2010) 191 Ohio App.3d 822, the liability of a guarantor can be extensive and go well beyond just payment of what would be commonly understood to constitute “rent” due under the lease.

    In the Strip Delaware case, the landlord, The Strip Delaware, L.L.C., entered into a lease with Landry’s Seafood House-Ohio, Inc., which was the tenant. The parent corporation of the tenant, Landry’s Seafood Restaurants, Inc., a Delaware Corporation (“Landry’s”), executed a separate guarantee agreement with the landlord concerning the lease. On appeal, Landry’s argued that it was not liable to pay the landlord’s attorney fees which it incurred in the subsequent lawsuits filed after the tenant defaulted. Landry’s argued it only executed a separate guarantee agreement which did not expressly make it liable for the payment of attorney fees.

    The appellate court flatly rejected Landry’s argument and affirmed the trial court’s award of a judgment in favor of the landlord and against Landry’s for attorney fees in the amount of $133,908.66, plus interest at the rate of 18 percent from June 9, 2008, when the trial court entered the original judgment granting attorney fees.

    This case illustrates an all too common problem that arises in the context of commercial guarantees whether the same are used in a lease or some other commercial transaction document. When a guarantee agreement or guarantee provision is made part of the transaction, the party executing as “guarantor” does not fully understand or appreciate what it is agreeing to pay in the event of a default by the tenant or primary obligor. Oftentimes the misunderstanding is the difference between a “business understanding” of what is being agreed upon as compared to the legal significance of what is actually set down in writing and executed by the parties.

    For example, in everyday usage the term “rent” is commonly understood to mean the amount that must be paid per month for rental of the property at issue and perhaps it also includes associated CAM (common area maintenance) charges. The term “rent,” however, can have a far broader meaning depending upon how it is defined in the lease. As one would expect, if a dispute progresses to litigation involving a commercial lease, what had been discussed in the negotiations or what the parties believe was the agreement will not be given any consideration by the court if the issue is covered by clear and unambiguous provisions in the written lease.

    In the Strip Delaware case, the guarantee agreement executed by Landry’s did not specifically say anything about Landry’s being liable to the landlord for payment of its attorneys’ fees in the event the landlord became involved in litigation due to the tenant’s default. But, the lease broadly defined rent to mean: “[e]xcept as provided to be paid by Landlord, Tenant shall pay any and all rents and sums of money or charges required to be paid by tenant under this Lease (collectively the ‘Rent’).” The lease further provided that in the event the landlord had to bring suit for “recovery of rent or any other amount due” the losing party would be liable to pay the prevailing party its expenses, attorneys’ fees and court costs.

    After analyzing the definition of “rent” in the lease and the language utilized in the guarantee agreement, the trial and appellate courts both concluded that the guarantee agreement executed by Landry’s made it liable for payment of landlord’s attorney fees plus 18 percent interest in addition to the other amounts recoverable by the landlord.

    Accordingly, cases like Strip Delaware illustrate the importance of having a thorough understanding of what all the technical aspects of a commercial lease mean before it is executed so that, if a problem later arises, the parties including any guarantor are not subjected to unpleasant surprises regarding their respective rights and obligations under the lease.