Leasing to Non-U.S. Tenants: Protecting Against Default and Ensuring Enforcement

By Ellen Siegel, Esq.

Special considerations need to be addressed when a prospective tenant is not a U.S. business or individual. These considerations are geared to ensuring that the tenant and the guarantor, if any, have sufficient assets within the U.S., and that all jurisdictional and choice-of-law provisions provide sufficient protection to the owner’s ability to litigate disputes within the U.S. and applicable state—and the ability to enforce any subsequent judgment.

Key Considerations

Here is a checklist of items to address when negotiating and drafting a lease with a non-U.S. tenant:

[] Sufficiency of U.S.-based assets. Confirm that your prospective tenant has sufficient assets within the United States to comply with payment provisions, as well as to satisfy a judgment.

[] Guarantor requirement. Preferably, the tenant can provide a U.S. guarantor, but if a non-U.S. entity or individual is the only available option, be sure to confirm that the guarantor has sufficient assets in the United States.

[] Alternative to guarantor. In the absence of a guarantor, consider using letters of credit or a security deposit.

[] Local agents. Require the appointment of local agents to accept notices and service of process for both the tenant and guarantor.

[] Acknowledgement of jurisdiction. Draft clear and express language in the lease and the guaranty that the respective parties submit to the jurisdiction of the applicable court.

[] Acknowledgement of final judgment. Draft clear and express acknowledgements by the tenant and guarantor that the final judgments are binding.

[] Choice of law. Include a clear choice-of-law provision identifying the law governing the lease.

A recent New York case illustrates the need for clarity with respect to drafting the jurisdictional and choice-of-law provisions of the lease and guaranty.

Case in Point

The owner, a New York general partnership with its principal office in Nassau County, N.Y., leased a theatre, located in New York County, to an entertainment company, a Delaware corporation (which, as indicated in the decision, could also “be construed as a New Jersey corporation”).

The lease directed the tenant to make payments to the owner at an address in New York County. Contemporaneously with the lease signing, an Indian company, of which the tenant was a subsidiary, executed a guaranty in favor of the owner.

About four years into the lease, the tenant ceased paying rent and real estate taxes. The owner subsequently sent the guarantor a notice of the tenant’s default but received no response. No other tenant subsequently leased the premises.

The owner sued the guarantor for breach of contract in the United States District Court for the Southern District of New York, seeking:

• Damages for unpaid rent, real estate taxes, late charges, and associated legal fees (Count One);
• Damages for repair and cleaning expenses and associated legal fees (Count Two); and
• A declaration that the guarantor is liable for liquidated damages until the lease term expires (Count Three).

The owner moved for summary judgment for damages and fees sought in Counts One and Two, and for a declaration of the guarantor’s liability for liquidated damages (Count Three). The guarantor moved to dismiss the complaint for lack of personal jurisdiction.

Ruling: The guarantor’s motion to dismiss the claims for lack of personal jurisdiction was denied. The owner’s motion for summary judgment for damages under Counts One and Three were granted, and with respect to the owner’s claim for a declaratory judgment, the court ordered that the owner submit a proposed judgment with detailed support for the amount of damages sought, including an explanation of its reading of a damages cap in the guaranty that limited the guarantor’s liability.

The Court’s Reasoning

I. Motion to Dismiss for Lack of Jurisdiction

New York Long-Arm Statute. The court rejected the guarantor’s claim of lack of jurisdiction under the New York long-arm statute, which provides that a court may exercise personal jurisdiction over a non-domiciliary that “transacts any business within the state or contracts anywhere to supply goods or services in the state”[N.Y. C.P.L.R. 302(a)(1)].

The court found that the guarantor was subject to the court’s jurisdiction under the statute in that the guarantor had contracted to provide services in New York and that a financial guaranty payable in New York is a contract to perform services. Further, it found that the absence of a specific provision in the guaranty stating that it is payable in New York was immaterial in that a guaranty to make payments to a New York entity—here a New York-based partnership with its principal place of business in New York—constituted a contract to provide services in the state under the statute. “Thus, by signing and delivering a guaranty to make payments to [the owner] in the event of [the tenant’s] default, [the guarantor] contracted to provide services in New York and is subject to New York’s long-arm statute.”  

Constitutional Right to Due Process. With respect to the due process argument, the guarantor claimed that it did not have “sufficient minimum contacts with New York such that subjecting it to the jurisdiction of [the] Court would comport the Due Process Clause, because the Guaranty does not contain a choice of law provision or a forum selection clause and [the Guarantor] has not created any contacts with New York.” The guarantor alleged a number of other grounds supporting its claim of the lack of minimum contacts, including the fact that the guaranty had been executed by its officer in India.

The court in strongly worded language rejected the guarantor’s claims that it had not established contacts with New York, noting that the company had “guaranteed the lease of its subsidiary in New York, without which there would have been no lease.” The court found that the guarantor “established contacts with New York by guaranteeing a lease that states on its face that lessor is a New York-based entity and that lessee must pay rent in New York.”

The guarantor also claimed that defending the case in a foreign legal system presented a burden, which the court rejected based on its analysis of whether the claim met the “reasonableness” test under the Due Process Clause. That test requires an analysis of: (1) the burden that the exercise of jurisdiction will impose on the defendant; (2) the interests of the forum state in adjudicating the case; and (3) the plaintiff’s interest in obtaining convenient and effective relief.

The court found that the plaintiff is a New York general partnership, and therefore New York’s interest in the dispute is significant; that the “the conveniences of modern communication and transportation” eases any burden that the defense of the case in New York might impose on the guarantor; and that the guarantor owned a number of subsidiaries incorporated throughout the United States, which also further weakened its argument regarding any burden in litigating the matter in New York.

II. Owner’s Motion for Summary Judgment for Damages and Request for a Declaratory Judgment

The court granted the owner’s motion for summary judgment for damages finding that it met its burden of showing that there was no genuine dispute as to any material fact and that it was entitled to judgment as a matter of law. The guarantor in support of its opposition to the motion had submitted a declaration of the guarantor’s attorney which alleged facts relating to the amount of debt remaining. The court found that the declaration was not based on the personal knowledge of the declarant. “Neither statements made on information and belief nor those based on inadmissible hearsay can create a dispute of a material fact,” said the court.

With respect to the guarantor’s claim that the owner should have mitigated its damages, the court rejected as “frivolous” the guarantor’s contention that the court should not apply New York law on the issue of mitigation as “repugnant to New York public policy.” (New York courts have held that there is no duty on the part of the lessor to mitigate damages in commercial leases by re-letting the premises, absent an agreement.)

The court further rejected the guarantor’s claims opposing summary judgment based on a number of equitable and contract grounds: implied covenant of good faith and fair dealing; unclean hands; waiver; equitable estoppel; and laches.

Finally, the court also rejected the guarantor’s claim that the dispute be submitted to arbitration, finding that the arbitration provision applied to disputes between the owner and the tenant, but not to disputes with the guarantor [59th St. Assocs. v. Reliance Mediaworks Ltd (S.D.N.Y. Mar. 3, 2016)].

Ellen Siegel is a writer, lawyer, and publishing consultant based in New York City. She specializes in the information and research needs of lawyers and regulatory professionals.