Don't Assume Personal Guaranties Continue After the Lease Is Renewed

When you renew a lease that includes a guaranty from the tenant’s business principal or another third party, you might assume that the guaranty will automatically continue into the renewal term. But if you don’t get the guarantor to sign off on the renewal lease, you may be unable to hold the guarantor accountable for defaults the tenant commits during the renewal term.

Guaranty Ends After Original Lease Term

A case in point is the Ohio landlord that entered into a five-year lease that included personal guaranties from the restaurant tenant’s managing partners. After five years, the tenant renewed the lease; but this time the guarantors weren’t signatories to the agreement. No big deal, figured the landlord, relying on language from the original lease stating that any renewals would be “subject to the same terms, covenants and conditions as provided in this Lease.” So, when the tenant vacated two years later, the landlord sued the guarantors for the nearly $50,000 the tenant owed in unpaid rent and taxes.

But the guarantors claimed that the guaranty covered only the original lease, and the court agreed. If a lease doesn’t “clearly and unambiguously express the intention of the parties that the guarantor of rent payments is liable for such payments beyond the original term of the lease, the guarantor’s liability terminates at the expiration of the original lease,” the court reasoned. Nothing in the original lease expressly stated that the guaranty would continue after renewal, and the guarantors didn’t sign the renewal lease the way they did the original lease. Result: There wasn’t a “clear and unambiguous” intent to bind the guarantors to the renewal lease [L.I. Development-Ohio, L.L.C. v. 6150 SOM Ctr. Rd., L.L.C., 2019-Ohio-3514, 2019 Ohio App. LEXIS 3591].

Three Takeaways

1. Guaranties don’t automatically continue when a lease is renewed;
2. There must be clear and unambiguous indication of the intent to extend the guaranty when the lease is renewed; and
3. The best way to prove this intention is by expressly stating in the original lease guaranty that the guaranty covers any renewal terms and/or having the guarantor sign the renewal lease.