Lease guaranties serve an integral purpose in the post-pandemic New York rental market, where many owners have grown wary to accept tenants who are less-than-qualified. In such cases, such owners have typically accepted a guaranty by a third party guarantor to pay rent in the event that the tenant fails to pay. A guaranty is, thus, a useful device that offers assurances for owners focused on risk management, while enabling tenants to secure apartments they might otherwise be financially unqualified to rent.
It is generally undisputed that a guaranty lasts the full term of the lease – but will it survive lease amendments, extensions, renewals, subsequent leases and the like? Recently, in 511 E. 80th St. LLC v. Margalit, the New York County Supreme Court had an opportunity to examine the lifespan of the residential lease guaranty.
In that case, the parties had entered into a lease with a two-year term commencing in 2016. The guaranty expressly indicated that it would “not be affected by any change in the Lease whatsoever” including, but not limited to “any extension of time or renewals.” Notably, the guaranty also provided that the guaranty would bind the guarantor even if the guarantor was not a party to the changes to the lease.
When the initial term of the lease ended, the tenant failed to vacate the premises and became a “holdover” tenant. However, the parties subsequently entered into two additional leases—neither of which referenced the initial lease and neither of which were signed by the guarantor. Making particular note of the lack of reference to the original lease, and the nine-month lapse of time between the expiration of the original lease and the subsequent lease, the Supreme Court declined to extend the obligations of the guarantor to the subsequent leases between the same parties. The guarantor’s obligations were, thus, curtailed.
What does this mean for owners with tenants whose leases have guarantors? At a minimum, owners must ensure that the guaranty expressly states that the guarantor’s obligations will survive any holdover, renewal, amendment, and/or extension of the original lease. In addition, the guaranty should clearly state that the guarantor’s obligations extend to any succeeding lease between the same parties for the same premises. Further, any extension or modification of a lease must specifically reference the original lease and the obligations of the guarantor. This concept was fatally absent in 511 E. 80th St. LLC v. Margalit, as the owner there had failed to mention the original lease in the subsequent agreements, and did not reference the continuing nature of the guaranty.
The Court’s decision in 511 E. 80th St. LLC v. Margalit demonstrates the necessity for owners and their counsel to be particularly careful with lease guaranties, and the drafting of subsequent agreements between the parties, to preserve the owners’ expectations of payment security.