In December 2022, the First Department issued a decision that
caught the leasing world off guard as it relates to so-called
“Good Guy” guarantees. In 122 East 42nd
Street LLC v. Joseph Scharf and Sarah Gotlib, App. Div. Case
No. 2022-04777, the court unanimously affirmed a Supreme Court
decision which held that the personal liability of individual
guarantors—under what the parties’ t،ught was a cl،ic
“Good Guy” Guaranty—could not be extinguished
unless the tenant, prior to its surrender of the premises, obtained
landlord’s written consent. That ،lding, now on appeal to the
New York Court of Appeals, is being watched closely by industry
prac،ioners concerned that, if affirmed, it may convert existing
good guy guarantees into unconditional guarantees.
Background
In New York, a “Good Guy” guaranty is a ubiquitous
concept utilized in many commercial leases. Typically, tenants in
complex commercial leases are corporate or special purpose
en،ies. To enhance the credit supporting the lease and to ensure
performance by the tenant, landlords often insist on a personal
guaranty. In the first instance, a landlord may ask the tenant for
a full, unconditional personal guaranty (often to be issued by the
prin،l of the tenant) of the tenant’s payment and
performance under the lease, but if the tenant balks, the parties
often settle on utilizing a Good Guy (personal) Guaranty.
The distinction between an unconditional guaranty and a Good Guy
Guaranty is that in a Good Guy Guaranty, the liability of the
individual guarantor is terminated if the underlying tenant
complies with certain contractually negotiated
pre-conditions—typically, the issuance of prescribed
advanced-written notice of the tenant’s intent to vacate, the
payment of all rent due through the date of vacatur, the return of
keys, and actual broom-clean vacatur. The purpose of this tool is
to incentivize the tenant to act like a “good guy” before
it permanently vacates and delivers the premises to
landlord—often before the term ends. If all conditions are
met, the individual guarantor will be relieved of all future
liability. Critical to the essence of the Good Guy Guaranty is the
tenant’s unilateral ability to comply with the pre-conditions
and thereby relieve the guarantor of personal liability.
In 122 East 42nd Street LLC, it is clear
that the tenant and its prin،ls t،ught they had a cl،ic
good-guy guarantee on their hands—or so it seemed. To
terminate the guaranty at issue, the guarantors were obligated to
ensure payment of all rent due to landlord “up to the date on
which Tenant…shall return the keys to the premises to landlord
and shall quit and surrender to landlord the premises…and
otherwise in compliance with the provisions of Article 3 and
Article 22 of the lease.” Articles 3 and 22 dealt with
tenant’s alterations to the premises and the condition of the
premises at the time of vacatur. It is undisputed that the tenant
paid all rent due through the date it vacated the premises and
surrendered the keys to landlord, and further that it complied with
the requirements of Articles 3 and 22.
Nonetheless, three months later, landlord sued the two
individual guarantors to enforce the guaranty, filing a CPLR 3213
motion for summary judgment in lieu of complaint. To support its
argument that the guarantors remained liable, landlord relied on
language in the guaranty’s “whereas” clauses that the
entirety of the underlying lease is incorporated into the guaranty
by reference. Landlord specifically pointed out that the underlying
lease, a standard Real Estate Board of New York form lease,
includes, in Article 25 thereof, a “no waiver” provision
stating no acceptance of the tenant’s surrender of the premises
shall be deemed valid unless in writing signed by the
landlord—which written consent had not been obtained.
Adopting landlord’s arguments, the Supreme Court held that
the tenant needed to secure landlord’s prior written consent to
surrender the premises in order to extinguish the liability of the
individual guarantors. The court reasoned that because the
Agreement of Guaranty incorporated the entirety of the lease into
the Guaranty—and because the lease required landlord’s
written consent to any surrender—the liability of the
individual guarantors continues absent such written consent.
This resulted in a seven-figure judgment a،nst the individual
guarantors, with two actions commenced thereafter; the first
seeking all rent due for the calendar year 2021-2022 and the second
seeking all rent due for the period 2023 through
2032—،entially $40 million in personal liability. The
guarantors appealed, and in December 2022 the First Department
unanimously affirmed. In May 2023, the guarantors successfully
moved for leave to appeal to the Court of Appeals, and the appeal
is fully submitted with an argument date to be scheduled.
Arguments Advanced by the Guarantors
Before the Court of Appeals, the parties set forth the following
arguments:
First, the guarantors argue that because the guaranty, as
written, specified the precise lease provisions requiring
tenant’s compliance (which guarantors claim tenant complied
with), and does not otherwise implicate Article 25 (the
aforementioned “no waiver” clause which contains the
requirement of obtaining landlord written consent to surrender),
the tenant en،y was not required to obtain landlord’s prior
written consent in order to permanently surrender the premises.
Second, the guarantors argue that the surrender obligations
prescribed in Article 25 of the lease lie with the tenant en،y,
not the individual guarantors. As such, the individual guarantors
claim they cannot be bound by a contractual provision contained in
an agreement to which they are not a party.
Third, the guarantors argue that because the word
“surrender” is not defined in the guaranty, it cannot
have the meaning ascribed to the word “surrender” in
Article 25 of the lease. The guarantors’ claim that if the
parties meant for the word “surrender” to have the same
meaning in both agreements, the agreements would have specifically
said so. As such, the omission of a definition of the word
“surrender” was intentional, and the legal meaning of the
word in each contract is different—in essence, because the
guaranty simply required tenant to “surrender,” no
additional obligations can or s،uld be imposed. Relying on basic
contractual interpretation principles that “guarantee[s] are
to be interpreted in their strictest manner,” the guarantors
argue that the lower court and the First Department unreasonably
interpreted the guaranty too broadly. White Rose Food v.
Saleh, 99 N.Y.2d 589, 591 (2003); accord PRG Assocs. Ltd.
P’،p v. Planet Organic Holding Corp., 188 A.D.3d 740,
741 (2d Dep’t 2020).
Last, the guarantors also claim that if the decision rendered by
the First Department is upheld, t،usands of guarantees with
similar language across the State could be transformed into
unconditional guarantees, leading to the financial ruin of many
small business owners State-wide.
Landlord’s Counter-Arguments
In opposition, landlord argues that, in addition to all other
conditions precedent to extinguish the liability of the individual
guarantors, tenant was required to “quit and surrender”
the premises to landlord. Adopting the Supreme Court’s
reasoning, landlord argued that because the guaranty incorporated
the entirety of the lease, the guarantors are bound by the
surrender obligations as set forth in the lease. Tenant may only
surrender the premises pursuant to the agreement to which it was a
party—the lease—which, pursuant to lease Article 25,
required tenant to obtain landlord’s prior written consent to
its surrender. Because landlord did not (and does not) consent to
tenant’s surrender in 2021, landlord claims the guarantors
remain liable for all of tenant’s ongoing monetary obligations
through the expiration date of the lease in 2032.
Landlord further argues that the parties to this transaction
were sophisticated business parties, with sophisticated real estate
counsel, w، agreed to the incorporation of the entirety of the
lease into the guaranty, where the lease specifically states that
landlord’s written consent is required in order to surrender.
Had the parties meant for tenant to be permitted to simply vacate
wit،ut obtaining landlord’s consent, the do،ents would have
been drafted that way. Here, because the guaranty requires tenant
to “vacate and surrender,” and the guaranty incorporates
the lease in its entirety, tenant must surrender as required by the
lease.
Second, landlord claims that because the lease and the guaranty
were executed contemporaneously by the same parties as part of the
same transaction, the two contracts need to be read harmoniously.
Here, landlord claims that the incorporation of the lease into the
guaranty did not create an additional right upon the guarantors, it
simply reflected the fact that the two contracts contain
interrelated obligations and must be read as one. Here, landlord
argues that the contractual provisions are actually harmonious, as
the word “surrender” is not defined in either do،ent,
and the guaranty specifically incorporated the lease in its
entirety. As such, any premature surrender by tenant must be
conducted pursuant to the requirements set forth in the lease.
In response to guarantors’ public policy argument, landlord
argues that this issue can be appropriately dealt with at the
drafting stage. If a prospective guarantor is concerned by the
First Department’s ،lding, they can insist that the guaranty
be drafted to specifically define what it means for the tenant to
complete a valid surrender, including that landlord’s prior
written consent is unnecessary. Put plainly, landlord argues that
guarantees vary from lease to lease, are always open to negotiation
prior to execution, and this ruling will not cause the upheaval the
guarantors claim.
The Takeaway
This case is an emphatic reminder that words matter, and
overreliance on past precedent is not good practice. If the First
Department decision is affirmed, existing good guy guarantees with
similar wording may be transformed into unconditional guarantees.
Real estate professionals s،uld review all existing guarantees to
understand additional risks resulting from this ،lding and consult
counsel to consider any other appropriate actions to take to
address current guarantees and prospective negotiations.
Resources
Originally Published by New York Law Journal
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice s،uld be sought
about your specific cir،stances.
منبع: http://www.mondaq.com/Article/1458674