Avoid Ambiguity in Personal Lease Guaranty

July 17, 2014
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You may think that when your lease term ends for one reason or another, your rent obligations have also stopped. But under some circumstances, you could be on the hook for a new tenant’s failure to pay. For example, if you signed a personal guaranty while you were a tenant in a shopping center or an office building and then sold your business, you could be liable under that guaranty for the new tenant’s rent if it stops its payments to the owner—unless you specifically provided in the guaranty that your obligations would come to an end if certain events, such as a sale of your business, would extinguish your responsibility.

A recent case highlights the importance of avoiding ambiguity in legal documents. There, a coffee shop tenant signed a lease for space in a strip mall, and signed a personal guaranty, promising that he would be financially responsible if the lease were defaulted on. The tenant later sold the coffee shop. When the new coffee shop tenant stopped paying rent, the owner sought payment from the guarantor. A district court agreed with the owner that the guarantor was responsible for the rent. The guarantor appealed. A Minnesota appeals court upheld the lower court’s decision.

The guarantor asserted that he wasn’t liable under the personal lease guaranty, because he was no longer the tenant and the coffee shop had been purchased by another party. He argued that when his business—whose performance he originally guaranteed—was released from the lease when the business was sold, his personal liability ended as well. But the appeals court disagreed. It said that because the lease guaranty was ambiguous and the lower court’s factual determination that the parties didn’t intend to release the guarantor from his guaranty obligations wasn’t clearly erroneous, it upheld the lower court’s decision [Southcross, LLC v. Meridius Co., LLC, March 2014].

 

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