When a corporation or other entity leases commercial property, the landlord often requires the corporate tenant to provide a guarantor. Typically, this is done when the corporate tenant is a recently formed entity and has no real track record of payment, or simply as additional security in the event the corporation goes out of business. A “good guy” guarantee, as it is known, is an agreement between the landlord and an individual who guarantees payment of the corporation’s obligations until such time as the corporation turns the premises over to the landlord in vacant and broom-clean condition. While these agreements are relatively common, a recent decision of the New York State Court of Appeals illustrates why it is critical for both the lease and guarantee to be carefully drafted to avoid litigation.

In 1995 CAM LLC v. West Side Advisers, LLC, the issue was whether the guarantor was liable for amounts owed to the landlord after the tenant vacated the premises. The parties’ lease contained a provision that the landlord must accept the surrender of the premises in writing for the surrender to be valid. The guarantee agreement stated that the guarantor was responsible for amounts that accrued under the lease up until the date that the tenant completely vacated the premises and surrendered the same free of all occupants.

The lower court and Appellate Division found that the guarantor was liable for amounts accrued after the tenant vacated the premises based on the fact that the guarantee agreement “incorporated” the terms of the lease, and the lease stated that surrender of the premises by the tenant was only valid if accepted in writing by the landlord. Since the landlord didn’t accept the surrender in writing, both lower courts held that the guarantor was responsible for payment even after the tenant vacated the premises.

The Court of Appeals reversed both lower courts, finding that while the corporate tenant remained liable because the surrender was not accepted in writing, the guarantor was not responsible for money owed post-surrender under the terms of the guarantee. As noted by the Court, the whole point of the good guy guarantee was to limit the personal obligation of the guarantor. The guarantee in question clearly stated that the guarantor was only responsible for amounts which accrued under the lease up until the date that the tenant completely vacated the premises and surrendered the same free of all occupants. Additionally, the corporate tenant provided the landlord with the required 30-day prior written notice of the date it would be vacating. Once the tenant vacated the property, the guarantor was not liable for any amounts due to the landlord after that date.

The Court further cited numerous cases holding that contracts must be construed in a way that would not render any provision meaningless. It found that the conditional language contained in the guarantee would be rendered meaningless if the guarantor’s liability could be extended merely because the landlord refused to accept the surrender in writing.

While the Court did not find the ruling to be inconsistent with the terms of the lease, the decision noted that the guarantee contained a provision indicating that the terms of the guarantee control in the event of any inconsistency between the terms of the lease and the guarantee.

The lesson here is that when signing a lease, you should have an experienced attorney review the same for you to avoid the potential cost and time commitment of litigation.

If you are entering into a commercial lease or have been asked to provide a guarantee, please contact one of our real estate attorneys.