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Is a Commercial Landlord Who Secured a Personal Guaranty to Ensure Performance Under a Lease Protected in a Holdover Situation?

By Noah A. Schwartz

The Appellate Division has recently upheld summary judgment in favor of a guarantor who had executed a personal guaranty for rent due under a lease, finding that the specific language of the guaranty, read in conjunction with the language of the lease, rendered the guaranty inapplicable in a holdover situation.

In Montpen SC, L.L.C. v Mathews Art, Inc., d/b/a/ Art Wholesalers, Ltd., A-5036-09T3 (March 30, 2011), the Appellate Division had before it a situation where a tenant's business had been purchased by a third party and its lease assigned to the purchaser. Fearing that the purchaser, a shell company, would be judgment proof in the event of default, the landlord required that the principal of the purchaser execute a personal guaranty to secure the landlord's consent to the assignment of lease and agreement of an extension of the lease.

Notwithstanding the landlord's exercise of caution, the landlord was not careful enough. The lease specifically addressed a holdover situation and designated such circumstances as not constituting a renewal or extension of the lease. The guaranty, however, contained specific language which limited the guarantor's obligations under the lease to the initial term of the lease and any 'extensions and renewals thereof.'

In finding that the guaranty was not enforceable in a holdover situation, the court dispensed with the landlord's argument that the guaranty was a substantial inducement for its agreement to allow the assignment and to authorize the extension of the lease. The court, having before it a clear and unambiguous lease and guaranty, declined to make for the landlord a better agreement than it had made for itself.

Commercial landlords should be aware of the possibility of a guarantor escaping his responsibilities under a guaranty and ensure that they have enlisted counsel cognizant of the potentially ruinous results of a poorly crafted lease or guaranty. Moreover, an abundance of caution should be exercised when dealing with savvy tenants who use, and often abuse, the myriad corporate forms available to them in order to avoid liability.

Full post as published by New Jersey Law Blog on March 30, 2011 (boomark / email).