Good guy guarantees
whitm...@gmail.com
Many commercial leases contain “good guy” guaranties, typically signed by the principals behind the tenant entity. If the lease allows the tenant a right of early termination, it is expected that the guarantors’ obligations will likewise terminate, provided that the tenant meets all of the conditions for a proper early termination.
A recent New York case throws that assumption into question. It’s 122 East 42nd Street LLC v. Joseph Scharf, (211 A.D.3d 517, 182 N.Y.S.3d 607 (N.Y. App. Div. Dec. 15, 2022). The tenant exercised the right of early termination, but the landlord took the position that the two guarantors remained liable for the rent, to the tune of $1.27 Million. The guaranty referenced specifically only two sections of the lease, which specified the condition that the property had to be in when it was surrendered. (No one questioned that it complied.) Unfortunately, the preamble of the guaranty also incorporated by reference the entire lease. So the court said that the right of early termination could not be exercised without the landlord’s consent at the time the lease was surrendered.
The incorporation by reference was a major drafting goof. The trial court and the Appellate Division both took this to indicate that the guarantors were indeed liable for performance of the entire lease… for its entire term. The case is now on appeal to the NY Court of Appeals. There is little doubt that the lower courts’ construction isn’t what the parties had in mind when they signed the guaranty, but the incorporation of the full lease into the guaranty certainly muddied the water. We will see what the Court of Appeals thinks.
Here’s a cite to the guarantors’ final brief: 2022 WL 17733301
And the Appellate Division opinion: 122 E. 42nd St., LLC v Scharf :: 2022 :: New York Appellate Division, First Department Decisions :: New York Case Law :: New York Law :: US Law :: Justia
Blank Rome firm’s commentary: new-york-good-guy-guaranty-real-estate-alert.pdf (blankrome.com)
Meanwhile, watch out for incorporation of documents by reference. You might be getting a whole lot more than you bargained for.
Dale
Dale A. Whitman
Professor of Law Emeritus
University of Missouri-Columbia