Is Your Tenant's Lease Guaranty Enforceable?

If you require a tenant to have a guaranty in order for you to sign the lease with it, you may feel that you're protected in the event that the tenant stops paying rent. After all, the whole point of a guaranty is to be able to collect rent from the party who guaranteed the tenant's lease if the tenant fails to live up to its obligations. But if a guaranty hasn't been executed properly, you'll be left empty handed anyway when the tenant defaults.

That's what happened to an owner in a recent case in Indiana. After an office tenant held over its space past its lease term and stopped paying rent, the owner sued the tenant’s president in his personal capacity, asserting that he was a guarantor of the lease and thus was responsible for paying the rent when the tenant stopped. The president claimed that he hadn’t executed a personal guaranty of the lease between the tenant and owner that could be enforced. A trial court agreed and ruled in favor of the tenant. The owner appealed, but an appeals court upheld the lower court’s decision.

The appeals court reasoned that while there was a “guaranty of performance” clause in the 10-page lease, there was no signature line for the supposed guarantor, and no separate guaranty agreement was executed. The appeals court specified that the Statute of Frauds requires a guaranty to be in writing and signed by the guarantor in order to be valid. Although a guaranty need not be set out in a document separate from the underlying contract, the guaranty must still be executed by the guarantor.

The lease made it clear that it was between the owner and the tenant as a business entity. The personal guaranty provision in it was general and didn’t specifically designate the president as the guarantor; it simply referred to “the undersigned Guarantor”—but no such guarantor signed the lease, only the tenant and owner.

The owner argued that the same signature of the tenant also bound the president personally as guarantor. The appeals court determined that in the lease the tenant and the guarantor were referred to separately and the signature page expressly indicated that the signature for the company represented execution by the tenant. A single signature on this lease agreement can’t bind both the company as tenant and the corporate officer individually as guarantor, said the appeals court.

There was no execution of the guaranty agreement contained in the lease. Without a signature by the guarantor, there was no enforceable guaranty and the president wasn’t personally obligated under the lease [Jubilee Inv. Corp. v. BJ Thompson Assocs., July 2014].