Guarantys are Enforced when Breaking a Lease

Most small businesses and retail store owners don’t give it a second thought when they sign off on NYC commercial lease personal guarantys because they generally consider it a formality. breaking a lease

But take heed: The courts can and often enforce them when a tenant breaks a lease. A recent lease guaranty case, 4 USS LLC v. DSW was weighed by the New York Appellate Division, First Department.

A personal guaranty is when a small business or retail store owner guarantees payment on a commercial lease if the company doesn’t pay. Because it’s unsecured, it’s not tied to any specific asset, but the landlord generally has no obligation to first seek repayment from the company before going after the guarantor’s assets.

Our experienced Manhattan commercial lease attorneys want to stress that any time you sign off on a personal or commercial guaranty, there is the potential the company and you may be placed in grave financial jeopardy. It’s the equivalent of writing a blank check for someone else’s debts.

If you are asked to sign a personal guaranty on a commercial or retail lease, your attorney should carefully review the provisions to ensure you are not putting yourself or the firm at undue risk. There is always a chance you may one day be breaking a lease.

One of our goals will be to ensure the personal guaranty does not contain any clause or provision indicating that in the event of an assignment of the lease (for example, the sale of the business and “transfer” of the retail lease) that you are still stuck with the guaranty. You don’t want to be responsible for the default of an assignee or new tenant.

In the 4 USS case, the appellate panel reversed a summary judgment in favor of the shoe retailer, ultimately remanding the case for trial. The landlord is seeking the enforcement of a $100 million guarantee against a shoe retailer.

According to court records, a subsidiary of the shoe company guaranteed the lease in question because a department store affiliate was the original tenant and filed for bankruptcy. A bankruptcy court in Delaware authorized the department store affiliate to assume the lease and assign it to a second department store company, which would succeed the first department store as a tenant. The landlord and the second department store agreed to enact a lease modification.

However, the second department store defaulted. As a result, the landlord went after the parent company of the first department store to pay all money due under the lease. At the time, the landlord alleged the shoe retailer was liable because the shoe retailer had merged with the first department store’s parent company.

The shoe retailer has denied liability, saying the modification severed its duty of guaranty under the old lease.

Initially, a New York Supreme Court justice refused enforcement of the guaranty against the shoe retailer. However, in its reversal, the appellate panel found the landlord had staked a proper claim to enforcement because it was predicated on the breach of contract with the first department retailer. The landlord was not seeking to recover under the terms of the new lease but rather under the terms of the lease as it existed before modification.

An attorney for the landlord was quoted as saying the decision makes clear large lease guarantys will be enforced according to their precise terms.

That means before you or your company sign such an agreement, have your attorney thoroughly analyze the document to ensure your rights and interests are protected. We always advise our Clients to negotiate a release of the guaranty in the event of an assignment. We also consider the failure of a landlord to agree to a “good guy” guaranty to be a deal-breaker in lease negotiations. If your store goes out of business, you should be released, upon proper notice and consideration to the landlord, from paying all the rent due for the remainder of the lease term.

The Wright Law Firm is a business law firm located in Midtown Manhattan. Call (212) 619-1500 for a confidential consultation.

Additional Resources:

Landlord Wins Bid to Enforce Guaranty, Sept. 15, 2014, By Christine Simmons, New York Law Journal

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