Material Changes to Office Lease Insulates Guarantor From Liability For Corporate Tenant Defaults – Illinois Court

March 1, 2016 by

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).

Afterwords:

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.

Filed Under: Business Torts, Contract Law, Real estate litigation Tagged With: , , , , ,

Square Footage Discrepancy Not Material Term in Chicago Office Lease Dispute

August 10, 2013 by

smart-office-furniture-image-2(photo credit: www.smartofficefurniture.ca)

 123 Madison Street Corp. v. Power & Dixon, 2013 IL App (1st) 122795-U examines a commercial lease dispute involving a law firm tenant.

The facts: in 2002, plaintiff’s predecessor (the former office building owner) entered into lease with defendant law firm. Over the next few years, the Lease was amended three times to cover three different office suites – each bigger than the last and each requiring increased rent payments. Tenant defaulted and the building’s management company filed suit. Tenant vacated and the parties went to trial on money damages. Over the course of several hearings, and after the court substituted in the current building owner as the plaintiff, the trial court entered judgment for landlord, awarding nearly $70,000 in back rent plus attorneys’ fees over over $12,000. The Tenant law firm appealed.

Held: Judgment for landlord affirmed.

Reasoning: The appeals court rejected the law firms three key arguments: (1) that there was no privity of contract between plaintiff and tenant; (2) plaintiff materially breached the lease by renting less space than called for in the lease and over-charging the tenant; and (3) the trial court erroneously found that tenant was leasing the office suite for a “flat-rate” instead of leasing for a specific square footage amount. (¶¶ 45-56).

On the privity issue (privity doctrine basically requires that a party have some contractual relationship with the party being sued), the Court noted that the plaintiff wasn’t the lessor.  

The original plaintiff was the former owner’s management company and the substituted plaintiff was the building’s current owner.

The Court held that privity was a question of standing (only a party to a contract has standing to sue on it) and an affirmative defense that had to be pled and proved by the tenant.  Since the tenant failed to raise the privity/lack of standing defense by affirmative defense or motion to dismiss, the tenant didn’t meet his burden of proving the plaintiff’s lack of standing to sue. (¶¶ 50-51).

Tenant also argued that the landlord’s material breach precluded it from suing to enforce the lease.  The tenant claimed that while the lease provided for nearly 4,000 square feet of rentable space, the landlord was only leasing under 3,000 square feet.  The tenant claimed it overpaid the landlord nearly $100,000 for the shortened space.

The court rejected this argument stating that there was no evidence that the precise number of square feet of rentable space was a material term.  One of the law firm’s principals even testified that the square footage wasn’t a make-or-break issue:  the firm simply wanted “more space” than the prior suite.

 The Court also affirmed the trial court’s finding that the tenant was agreeing to pay a “flat rate” rather than a specific price per square foot.  (¶¶ 52-55).

 Take-aways: I’ve represented commercial landlords where the lease will have changed hands multiple times from lease signing to the date of trial.  When representing a property manager whose name differs from the one on the lease, I move to admit in evidence any management agreement between the owner/lessor and the property manager.

Another case lesson is that a lease square footage discrepancy will only be considered a material term if the lease says so.

Filed Under: Landlord-Tenant, Real estate litigation Tagged With: , , , , , , , ,