Daily Development for Tuesday, August 13, 2002

By: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu

LANDLORD/TENANT; GUARANTORS; RENEWALS: Although a guarantor will not be required to honor its obligations as to a lease that has not been extended or renewed in strict compliance with the terms of the original lease, this rule can be waived by the terms of the guarantee.

TCT Building Partnership v. Tandy Corporation, 751 N.E. 2d 135 (Ill. App. 2001) appeal denied: 763 N.E.2d 326 (Ill. 2001)

Lessee exercised an option in its lease to extend the lease for an additional five years. It sent its renewal notice less than six months prior to the end of the existing lease, but lessor nevertheless accepted the extension and acknowledged that the lease had been extended.

A few months later, lessee declared bankruptcy. Although it remained in possession and satisfied the lease requirements for several more years (and thus into the extension period), lessee eventually defaulted on several major economic requirements, and lessors sought recovery from guarantor, which acknowledged the existence of the guaranty but refused to pay.

At trial, guarantor argued that it was not required to honor a guarantee on a lease that had not been extended or renewed in strict accordance with the provisions of the lease.

The court, stating that the issue was one of first impression in Illinois, noted that the majority rule favors the guarantor's position, and, in keeping with the Illinois common law tradition of providing strict limits on the interpretation of guarantor liability, concluded that Illinois should follow the majority rule. Thus, a lease extended through a late notice will not be binding on guarantors, as a general rule.

But in this case, the court nevertheless found the guarantor liable because of the language of the guarantee contract. Because this is a useful drafting tip, the editor will set forth the operative language verbatim: "[N]o extensions of time granted to the Leessee [sic] for the payment of said rents or other sums, or for the performance of any of the obligations of the Lessee or forbearance or delay on the part of the Lessor to enforce any of the provisions, covenants, agreements, conditions, and stipulations of said lease, or waiver by lease [sic] of any of said provisions covenants, agreements, conditions and stipulations, shall operate to release or discharge the Guarantor from its full liability under this instrument of guaranty or prejudice the rights of Lessor hereunder."

Helpfully, the court outlined its detailed interpretation of this language, and noted that the agreement of the Lessee to honor the late renewal of the lease was addressed only in the last phrase of the defining language - i.e. the waiver was a "waiver of a covenant."

The guarantor argued that since the lessor did not specifically indicate at time of extension that it had determined that the request to extend the lease was late and that it had waived the lateness, there had been no formal waiver. Not so, said the court: "We know of no rule which requires that a waver-of defense-provision in a guaranty specifically itemize each defense which is waived."

Comment 1: The Editor has included the case as much for the rule that the case avoids, which was news to the Editor, and perhaps to some readers.

It would seem that, news or not, all lease guaranty drafters would be well advised to check their guaranties to be sure that they include the "magic words" blessed by the court here.

Comment 2: The case is consistent with the general trend concerning guaranties - although there is fluff in some cases that guaranties will be construed narrowly, the bottom line is that if the drafter of the guaranty manages to get the language of obligation set forth clearly, the courts will enforce that language. Guarantors get few protections from their own willingness to sign.

Comment 3: Isn't it comforting to know that courts will reach out to lousy proofreaders, such as the drafter of this guaranty language, and give them the substance of their agreement anyway? The editor, often guilty of poor proofreading himself, certainly finds it so.

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1‑6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Maria Tabor at the ABA. (312) 988 5590 or mtabor@staff.abanet.org

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