The Illinois First District recently examined the reach of a corporate officer’s commercial lease guaranty in a case involving a multi-year and multi-suite office lease. The office landlord plaintiff in Stonegate Properties, Inc. v. Piccolo, 2016 IL App (1st) 150182, sued to hold a corporate tenant’s CEO and lease guarantor liable for rental damages after the corporate tenant defaulted and declared bankruptcy.
The five-year lease was amended several times through the years – each time by the corporate tenant through its CEO and lease guarantor – culminating in an amended lease for three additional office spaces (compared to the original lease’s two spaces) in nearly triple the monthly rent amount from the original lease.
After the corporate tenant defaulted and filed for bankruptcy protection, the plaintiff landlord sued the guarantor defendant to recover nearly $1.4M in unpaid lease rental payments. The guarantor defendant successfully moved to dismiss on the basis that she was released from the guaranty since the lease parties made material changes to the lease and increased the guarantor’s risk with no additional consideration to the guarantor.
Affirming, the First District examined the scope of guarantor liability when the lease guarantor is also the corporate tenant’s principal officer.
The Court cited and applied these operative contract law principles in siding for the guarantor:
– A lease is a contract between a landlord and tenant, and the general rules of contract construction apply to the construction of leases;
– A guaranty is a promise by one or more parties to answer for the debts of another. A clearly-worded guaranty should be given effect as written;
– A guaranty is considered a separate, independent obligations from the underlying contract. Where a guaranty is undated, a court will still consider it as drafted contemporaneously with the underlying lease if the guaranty refers to that lease;
– A guaranty signed at the same time as the underlying contract is supported by adequate consideration. A contractual modification – something that injects new elements into a contract – must be supported by consideration to be valid and binding. Pre-existing obligations are not sufficient consideration under the law;
– In the context of commercial lease guaranties, a guaranty’s term is only extended if the underlying lease term is also extended in accordance with the lease terms;
– Common guaranty defenses involve changes to the underlying contract that materially increase the guarantor’s financial risk;
– Where the risk originally assumed by a guarantor is augmented by acts of the principal (the person whose debts are being guaranteed), the guarantor is released from his contractual obligations;
– Where a corporate principal signs a lease in her corporate capacity, she is not personally responsible for her corporate employer’s lease obligations. This is because a corporation is a separate legal entity from its component shareholders.
(¶¶ 40-45, 46-55, 60-62, 65-66)
Applying these principles, the Court sided in favor of the guarantor. The court noted that the lease addendum materially modified the underlying lease obligations and increased the guarantor’s fiscal risk. In addition, the guaranty was silent on whether it applied to material lease modifications. Because of this, the court found that the guarantor’s consent to the lease changes was required in order to bind the guarantor to the changes.
Since the guarantor never gave her express consent to the lease changes (broadening the leased premises from two office suites to 5; tripling the monthly rent), she was immunized from further guaranty obligations once the corporate tenant and office landlord signed the lease addendum.
The Court also rejected the office lessor’s attempt to fasten liability to the guarantor under a piercing the corporate veil/alter-ego theory. Since the plaintiff didn’t sue to pierce the corporate veil (such as under an alter-ego theory), the Court found that the guarantor’s execution of the lease addendum as an agent of the corporate tenant didn’t bind the defendant personally to the corporation’s lease obligations. (¶¶ 72-77).
Stonegate provides a thorough analysis of the contours of a commercial lease guarantor’s liability. While a guaranty is construed as written under black-letter contract law principles, if the guarantor’s principal (here, the corporate tenant) changes the underlying lease obligation so that the guarantor’s original risk is increased, the change in lease term will not be binding on the guarantor. This is so even where the corporate agent who agreed to the material lease amendment is the lease guarantor.