Make Guarantor Pay Despite Settling with Tenant

A guaranty is an important form of security that you depend on if the tenant defaults on its lease obligations. But suppose you and the defaulting tenant sign a settlement agreement that requires the tenant to pay only a portion of its back rent and other costs. In that case, you would want to go after the guarantor for the deficiency.

However, if the guaranty that you accept and the settlement agreement that you sign are not drafted properly, they may have a loophole that bars you from getting the deficiency from the guarantor. As a result, the guarantor may argue—and a court could agree—that the settlement agreement either capped his liability or released him from any further liability.

Plug Loophole by Adding Language to Guaranty, Agreement

You can plug that loophole by following these two steps, says Ohio attorney Abraham Lieberman:

Add language to guaranty. Make sure that any guaranty you accept states that the guarantor's liability will not be affected by any settlement or compromise agreement that you sign with the tenant, says Lieberman. That should include any releases. Plus, make sure the guaranty says that it will remain in effect even if the lease terminates and regardless of whether the guarantor is notified of a settlement or compromise agreement. Also make sure that the guarantor waives its right to get notices of a settlement or compromise agreement, he adds.

To do those things, have the guarantor add the following language to the guaranty:

Model Language

Guarantor's liability under this Guaranty shall not be affected, modified, diminished, or impaired by reason of any dealings, transactions, or matters between Landlord and Tenant that may cause the Lease to terminate, including without limitation, any adjustment, compromise, deferral, waiver, settlement, accord and satisfaction, or release of Tenant's obligations under the Lease, regardless of whether Guarantor receives notice thereof, all of which notices Guarantor expressly waives.

Add language to agreement. Have the tenant agree in any settlement or compromise agreement it signs with you that nothing in the agreement will cap or end the guarantor's liability under the guaranty, says Lieberman. This way, if the guarantor refuses to honor its guaranty, the tenant will have violated its agreement with you. Then, you can sue both the guarantor, for violating the guaranty, and the tenant, for violating the agreement. Also, state that you are still entitled to resort to all of your rights and remedies against the guarantor under the lease and guaranty, he adds.

Put the following language in a settlement, compromise, or other agreement that you and the tenant sign after the tenant's lease default:

Model Language

Neither the payments by Tenant under this Agreement nor anything contained herein is intended to limit or release Guarantor from any liability under the terms of the Guaranty and/or the Lease. As against Guarantor, Landlord is entitled to pursue all rights and remedies available to Landlord under the Guaranty, the Lease, and at law and equity.

Ohio Owner Keeps Guarantors on Hook

A savvy Ohio owner benefited from having similar language in its guaranties and settlement agreement. Here's how: A tenant signed a lease and gave the owner guaranties. The tenant then fell behind in its rent. The owner sued the tenant and the guarantors for unpaid rent. The owner settled with the tenant, without the guarantors' consent, for $153,650 in exchange for releasing the tenant from its liabilities under the lease. The parties then terminated the lease.

The owner continued its lawsuit against the guarantors, claiming that the terms of the guaranty made them responsible for all damages, regardless of the settlement agreement. The guarantors argued that the settlement agreement capped their liability and that the lease's termination ended their guaranty obligations.

A federal court ruled that the guarantors were still on the hook for back rent and other expenses. However, they could offset the settlement amount against the total amount owed. The court noted that the guaranties clearly stated that the “liability of Guarantor … shall in no way be affected, modified, or diminished by reason of any … settlements … or releases.” And the settlement agreement specifically said that neither the tenant's payments nor the agreement's other provisions were intended to release the guarantors from liability under their guaranties.

• New Market Acquisitions, Ltd. v. Powerhouse Gym: 212 F.Supp. 2d 763 (S.D. Ohio 2002).

CLLI Source

Abraham Lieberman, Esq.: Member, Stumphauzer, O'Toole, McLaughlin, McGlamery & Loughman Co., LPA, 5455 Detroit Rd., Sheffield Village, OH 44054; (440) 930-4001; alieberman@sheffieldlaw.com.