Daily Development for Thursday, October 22, 2009
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Husch Blackwell Sanders
Kansas City, Missouri

LANDLORD AND TENANT; GURANTORS:  A guarantor of a lease is not obligated under a purported “extension” of such lease where the lease extension actually amounts to a new lease between the initial parties. 

Lo-Ho LLC v. Batista, 881 N.Y.S.2d 33 (A.D. 1 Dept. 2009).

Landlord and Tenant entered into a commercial lease agreement in April 2000 in which Tenant’s obligations were personally guaranteed by Tenant’s cousin (“Guarantor”).  The guaranty executed by Guarantor in April 2000 provided that the Guaranty would “remain and continue in full force and effect as to any renewal, change or extension of the Lease.” 

Perhaps critically, although the guarantee covered “any renewal, change or extension of the Lease,” the April 2000 lease did not itself provide for renewal or extension, and stated that any holdover would result in an increase in rent but would not itself renew the lease.

The April 2000 Lease expired in March 25,  2005.  Tenant apparently held over.  Landlord and Tenant entered into another lease agreement on April 25 2005 (the “April 2005 Lease”) which was designated as an “Extension of Lease” and was effective as of April 1, 2005.  The April 2005 Lease provided for a substantial  increase in rent and real estate tax payments by Tenant as compared to the April 2000 Lease.  When Tenant defaulted under the April 2005 Lease, Landlord sought to enforce the Guaranty. 

The rent at the end of the 2000 Lease was about $2700 per month, up from $1950 five years earlier.  The rent under the 2005 Lease started at $2400 per month which increased annually by $2400.  Tenant had paid some taxes under the old lease.  Under the new lease, it undertook to pay all taxes. 

The New York Supreme Court held that the Guaranty did not apply to the April 2005 Lease since the terms of such lease were too different from the April 2000 Lease for it to be considered a mere modification or extension.  The Supreme Court, Appellate Division (the “Court”) affirmed the finding of the lower court.  The Court found that the new terms and conditions of the April 2005 Lease meant that it was not the type of extension contemplated by the Guaranty. 

The increased rent provided for under the April 2005 Lease would have substantially changed Guarantor’s obligations and such changes would have required the prior consent of Guarantor.  Additionally, the Court noted that the April 2000 Lease did not even include an extension option and the April 2005 Lease itself stated that the April 2000 Lease had expired in March 2005.

Comment: The editor is puzzled by the reasoning described here.  The court also talked about the fact that the new lease was not the old lease, which had expired by its own terms and did not provide for renewal.  The editor can accept that analysis of the problem.  But to argue that a guarantee of “any extension, change or renewal” of a lease would not be binding when the landlord and tenant in fact extended and changed the lease to add additional burdens strikes the editor as bad law, and likely not supported by precedent in New York or elsewhere.  Certainly the editor is not impressed with the application to the facts here.  Note that the rent actually went down, and then increased only $200 per year.  The court stated “[t]he April 2005 Lease contained new terms and conditions including an incrementally higher rent. The increased rent would have substantially and impermissibly changed the guarantor's obligations under the original agreement.”  To that the editor says: “Baloney.”

  The guarantor made a bad financial choice, but the editor believes that in general the New York courts are a bit less forgiving. 

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