Daily Development for Wednesday, April 26, 2006

Guarantor Liability for Holdovers

 

by: Patrick A. Randolph, Jr.

Elmer F. Pierson Professor of Law

UMKC School of Law

Of Counsel: Blackwell Sanders Peper Martin Kansas City, Missouri dirt@umkc.edu

 

LANDLORD/TENANT; GUARANTY; HOLDOVERS: Guarantor who executes a guaranty  agreeing to be “fully responsible for upholding all covenants of this lease, including monthly rent payments . . . .” is liable on guarantee for rental payments during holdover period when lease provides that in the event of holdover landlord, at its option, can accept proferred rend and create a month to month tenancy between the original parties, even when tenant holds over under the extended periodic tenancy for thirteen months beyond the original nine month lease.

 

Roth v. Dillayou, 835 N.E. 2d 425 (Ill. App. 2005) appeal denied 844 N.E.2d 47

 

This case involves an issue that is virtually unprecedented in Illinois, and the subject of a split in decisions around the country, although one would think the issue is reasonably cut and dried, and frequently addressed.  There even was a dissenting opinion in this case.

 

The lease provided that if tenant held over, in no event would a new term tenancy be created, but landlord had the option to accept rent payments tendered by the tenant and thereupon create a periodic month to month tenancy.  Landlord also had the option to treat the tenant as a trespasser at recover possession and rent for the holdover at 150% of the original rental amount.      

 

Tenant held over, and the landlord accepted rent for the holdover period, and the tenant wound up defaulting and then refusing to leave, resulting in a total holdover period of 13 months, for much of which tenant paid no rent.  The landlord sued the guarantor for all the back rent.  Guarantor argued that it had guaranteed only performance of the original lease.  Although the language of the original lease provided for a new periodic tenancy, the guarantor argued that the new tenancy was in effect a novation, and that the guarantor had no liability for it.

 

The trial court bought the argument.  The Illinois appeals court, reversing the trial court in a split decision, found that the guarantor was liable for the extended rent, notwithstanding the fact that the tenant held over for substantially longer than the original lease term and was bound to the periodic tenancy at the landlord’s option.

 

The court agreed that guarantors are favored parties in the law, and guaranties are read narrowly in their favor.  Nevertheless, the court concluded the plain language of the guaranty in this case was inescapable.  This is an interesting conclusion in light of the fact that the court noted that in other jurisdictions there is a split on cases like this.  It cited a Texas appeals court case that agrees with its approach, but a South Dakota case, certainly indistinguishable from the instant case in terms of the language of the lease and guaranty, found no guarantor liability.

 

“We do not believe that the contingent nature of the landlord’s consent should absolve the guarantor from liability during the month-to-month tenancy.  The consent and resulting month-to-month tenancy were contemplated in the lease agreement.  The better reasoning is that, once a guarantor is on notice that a month-to-month tenancy may result if the tenant holds over and the landlord consents to the arrangement, the guaranty continues to apply.”

 

The dissent, stressing that the guarantor is entitled to the benefit of the doubt, stressed the use of the term “covenant” in the language of the guarantee.  He stated that the tenant was not abiding by a “covenant” in the lease when she held over.  “Nothing the lease required [Tenant] to hold over and nothing in the lease required [Landlord} to permit [Tenant] to remain.  These choices appear to have been entirely unconstrained by the lease.”

 

The dissent also cited a Utah case that it believed supported its position.

 

Comment 1: Note that, although this is a residential lease case, there is no reason to believe that it should not apply to commercial leases as well.

 

Comment 2: The crux of the dissent’s argument really is that there is a “reasonable doubt” as to what the parties had in mind.  The editor agrees that one can split hairs about whether the language perfectly expresses the intent, but the editor agrees with the majority that there’s no real argument about what the parties really intended. 

 

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