A guaranty secures the faithful and timely performance of a tenant’s obligations under a lease and ensures that the landlord can legally pursue the guarantor in the event of a tenant’s default. A lease guaranty can come in a variety of forms: unconditional; limited or restricted; and “good guy”/“good gal” guaranties. Further, a guaranty can also be deemed a “continuing guaranty,” which essentially means that the guarantor’s obligation to the landlord is intended to cover future transactions such as lease renewals and extensions. This article will primarily focus on the legal effect of continuing guaranties.
Let’s begin with a few questions: With regard to a continuing guaranty, what happens when the landlord and tenant decide to make subsequent changes to the lease without the guarantor’s consent or input? Would the original guaranty still be deemed valid or invalid? Does a continuing guaranty need to include specific language stating that the guarantor must agree to waive any notice regarding future extensions or amendments to the lease in order for the guarantor to be held liable when the tenant breaches the lease?
The answers to these questions vary slightly based on which jurisdiction the dispute will be resolved or litigated. In some jurisdictions, even if the guaranty contains a “continuing guaranty” provision, which is often unlimited in time, and also does not require notice to, or consent of, the guarantor, a landlord may still be left unprotected. In other jurisdictions, a landlord may or may not be able to hold the guarantor liable if the lease was later amended without some sort of endorsement or consent from the guarantor. Further, in a few jurisdictions, a material change to the underlying lease will vitiate any of the guarantor’s future liability.
We will offer a sampling of how courts in some of the following jurisdictions might address these issues:
In Rhode Island, so long as the language is clear and unambiguous, the provisions of a continuing guaranty will be held valid and enforceable -particularly when it contains an express provision waiving the guarantor’s right to receive notice of any changes to the underlying lease.
Similarly, in Massachusetts, courts will enforce the provisions of a continuing guaranty when the express terms waived the guarantor’s right to notice and assent of subsequent changes or modifications to the lease.
New Hampshire does not have a ton of case law on the specific issue of continuing guaranties, but under New Hampshire law, a guaranty will be governed by contract law and the extent of the guarantor’s liability will be directly tied to the specific terms of the guaranty. If a fair reading of the guaranty, “taken as a whole”, is clear and explicit and shows an intent by the guarantor to assume the debt of the tenant upon default, a continuing guaranty will be fully enforceable.
In Connecticut, courts will evaluate the enforceability of a continuing guaranty based on the intentions of the contracting parties. Even when a continuing guaranty is intended to be unlimited in time or contains a notice waiver, Connecticut courts will generally limit a guarantor’s liability to a period of time that is reasonable in light of all the circumstances of that particular case. However, if multiple renewals of a lease were expressly anticipated and acknowledged by the guarantor at the time that the guaranty was executed, the guarantor’s liability will be fully enforceable.
In New York, a guaranty is construed in the strictest manner and the guarantor will be held to the express provisions of that guaranty. A guarantor’s obligations will not be extended beyond the express terms of the guaranty, and will most likely be released from liability if the underlying lease is modified in any manner without the guarantor’s prior consent. Conversely, a continuing guaranty containing a guarantor’s waiver of notice regarding future lease modifications will be subject to the same strict standard and enforced by New York courts.
In Illinois, a continuing guaranty which does not contain a specific time frame will not extend the guarantor’s liability beyond a “reasonable” time under the circumstances of that particular case. Further, notwithstanding a waiver of notice provision, if the modification to the underlying lease is deemed by the court to be a “material” or “essential” change, such that the guarantor is exposed to an increase risk than it did not originally anticipate, a guarantor might be able to establish sufficient grounds to be released from liability.
Under Florida law, a continuing guaranty is enforceable, provided that it expressly states that the guarantor will be liable for future extensions and renewals. Florida also recognizes the rule that a continuing guaranty remains in effect until revoked by the guarantor.
Given this divergence in how certain jurisdictions interpret the enforceability of a continuing guaranty, we will leave you with two main takeaways:
- Whenever possible or feasible, the landlord should always opt for having the guarantor sign a reaffirmation of the guaranty any time there is a material change to the underlying lease. This is a full-proof mechanism to ensure that the guaranty will be fully enforceable, no matter the jurisdiction; and
- In drafting the guaranty, the expectations of both the landlord and guarantor must be unambiguous and crystal clear as to both the waiver of notice and the scope and duration of the guarantor’s future liability. Specifically, the guaranty must contain clear and specific language as to whether the guarantor must be notified (or not) as to any future changes to the underlying lease terms, and also must contain clear language as to the scope and duration of the guarantor’s liability (i.e., limited to the term of the underlying lease, or an expectation that it will include future modifications, extensions and/or renewals).
