[FINANCE] DD 8/18/06 Release the lease assignee, you release the original tenant/surety.

Daily Development for Friday, August 18, 2006
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; ASSIGNMENTS AND SUBLEASES; MERGER: After a tenant has assigned a lease, the tenant remains liable as a “guarantor,” and not as a principal obligor.  Consequently, the tenant remains liable for rent not paid by the assignee until the lease is terminated, even if termination occurs through merger.  But landlord’s release of the assignee from liability under the lease will also be a release of the original tenant/assignor.

CO Lemon, LLC v. Host Marriott Corp.,   2006 Westlaw 1485235 (Ohio App. 5/31/06)

Marriott was the original tenant under a long term lease with CLM.  CLM approved an assignment of the lease to Elias in 1985.  Elias agreed to indemnify Marriott for any liability it incurred for Elias’ breach of the lease, but CLM did not release Marriott from the lease.

In 1999, Elias defaulted on the lease, and in 2000 Elias filed for bankruptcy.  Elias attempted to reject the lease, but finally, in a court approved settlement, the court vacated Elias’ rejection of the lease, authorized Elias (presumably Elias’ bankruptcy estate) to assume the lease and approved the assignment of the lease to CLM, which in turn agreed to waive any and all claims against Elias.

A year later, CLM filed suit against Marriott for the unpaid rentals accruing before and after the assumption of the lease by CLM.  It argued that the assumption had no impact on Marriott’s continuing liability for unpaid rent. 

The court ruled, quite properly, that the assumption by CLM led to a merger of the lease and a termination of any further liability of any party for performance of the lease.  But the court held that the merger, in and of itself, did not release Marriott from its obligations under the lease prior to the merger.  Those obligations included potential liability for the lease payments that Elias had not paid.

But the court then turned the case around on CLM by holding that more than the merger was at stake.  In addition, CLM had released Elias from any liability, both past and future, at the time of the bankruptcy settlement.  The court characterized Marriott’s liability under the lease, post assignment as that of a “guarantor,” and invoked the usual rule that a guarantor is released when the principle debtor is released. 

Thus, Marriott was out completely.

Comment 1: Typically, an original lessee is said to continue in liability under an assigned lease because the lessee remains in “privity of contract” with the landlord.  This is an interesting jurisprudential concept.  Under the ordinary law of real covenants, a party transferring real estate does not remain liable for the performance of the covenants.  Thus, an intervening assignee, who did not sign the original lease nor assume the lease, and later reassigned it to another, would not be in privity of contract or privity of estate, and would escape liability for post assignment defaults.  But the original lessee is stuck.

Thus, the court was correct in concluding that Marriott has potential liability here and also correct in concluding that the liability would be terminated when the lease was terminated by merger. 

What is curious here, however, is the court’s characterization of Marriott as a “guarantor.”  Most theorists would describe Marriott’s status as that of a “surety,” and not a guarantor.  The editor suspects that the distinction doesn’t matter much.  Sureties also normally get released when the principle debtor is released.  But there may be an argument that a creditor could release the principle debtor but reserve rights against the surety.  This would make it possible for the surety to have a subrogated claim back against the principle if it were ever forced to pay the creditor.  The editor isn’t sure that these same concepts of suretyship apply to all guarantors. 

Comment 2: In any event, the court suggests that language that often appears in boiler plate in commercial leases would have solved the landlord’s  problem. This court’s recommended language language  (taken from another Ohio case) reads as follows:

“[Tenant] may at any time assign this Lease . . . but no assignment or sublease shall reduce or affect in any way any of the obligations of [tenant] hereunder, and all such obligations shall continue in full effect as obligations of the principal and not as obligations of a guarantor or surety, to the same extent as though no assignment or subletting had been made.” 


The editor has always wondered whether this language really added anything.  According to the Ohio court, it does, and one would assume that any Ohio landlord’s lawyer ought to be adding this language to every lease at peril of malpractice.

Incidentally, the lease was not silent on the subject of Marriott’s continuing liability.  It stated “Tenant shall have the right to assign this Lease . . . provided Tenant continues to be liable for the prompt and full payments of the rentals and other payments required hereunder.” 

                                                                       
In light of the fact that, even if the lease were silent, Marriott would have been liable as a surety, is it really that clear that this language wasn’t also an attempt to impose non-surety liability on Marriott?  The court thought so.

Readers are encouraged to respond to or criticize this posting.

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