First Department Rules on the Applicability of Personal Guaranties in the Context of a Residential LeasePrint Article
- Posted on: Apr 15 2022
Personal guaranties are contracts of suretyship pursuant to which “one party as surety binds himself to the second party as creditor to pay a debt contracted by a third party either immediately upon default of the third party or after attempts to effect collection from the third party have failed.” General Phoenix Corp. v. Cabot, 300 N.Y. 87, 92 (1949). As to when the surety’s obligation arises:
[w]hether a surety is a guarantor of payment or a guarantor of collection depends upon the intention of the parties as expressed in the surety contract. If he binds himself to pay immediately upon default of the debtor, he becomes a guarantor of payment; if he binds himself to pay only after all attempts to obtain payment from the debtor have failed, he becomes a guarantor of collection.
Federal Deposit Ins. Corp. v. Schwartz, 78 A.D.2d 867 (2nd Dep’t 1980) (quoting General Phoenix, supra, at 92).
Lenders and landlords, among others, typically request personal guarantees as a form of security in a host of commercial and personal transactions, such as bank loans and leases. In many such instances, the guarantors are “private” or uncompensated. For example, a loan or lease may be guaranteed by a principal of a business borrower or commercial tenant and a personal loan or residential lease may be guaranteed by a parent.
Traditionally, guarantees have been “interpreted in the strictest manner [such that a] guarantor’s obligation cannot be altered without its consent; if the original note is modified without its consent, a guarantor is relieved of its obligation.” White Rose Food v. Saleh, 99 N.Y.2d 589, 591 (2003) (citations omitted); see also Lo-Ho LLC v. Batista, 62 A.D.3d 558 (1st Dep’t 2009) (holding same in the context of a “private guarantor” under a commercial lease). “Strictissimi juris,” or the strict construction of a surety obligation, has traditionally been applied in New York, and continues as to uncompensated sureties, but is not so rigidly applied in the context of compensated sureties. In this regard, the Court of Appeals has stated that:
Though it was the early rule in New York that a surety obligation is strictissimi juris, and the surety is discharged by any alteration of the contract whether material or not, and whether it is or is not to the surety’s injury, we have declined to apply the rule to compensated sureties in the context of construction contracts (…see also 23 Lord, Williston on Contracts § 61:5 [4th ed.] [“(t)he corporate compensated surety is not favored with the solicitude shown the private, uncompensated surety”] ). In such a case, discharging the surety is inappropriate where the purported alteration cannot be said to affect the surety adversely or to have any effect whatever upon the contract or the defendant’s obligation. It is incumbent on the surety seeking to be discharged to demonstrate that an obligee’s act has so prejudiced it that its obligation is impaired.
Mount Vernon City School Dist. V. Nova Cas. Co., 19 N.Y.3d 28, 36 (2012) (some citations, internal quotation marks, ellipses and internal brackets omitted).
On April 12, 2022, the Appellate Division, First Department, decided Paganini v. 40 West 127th Street, LLC, and addressed the principles discussed herein. The plaintiff in Paganini brought an action against her residential landlord seeking, inter alia, a declaration that the premises she occupied was subject to New York’s rent stabilization laws. [Eds. Note: some of the facts were obtained from the related supreme court proceedings available on NYSCEF.] Landlord commenced a third-party action against guarantors of tenants’ obligations under the lease. Landlord asserted that “the guaranties apply because they provided they would ‘remain and continue in full force and effect as to any renewal, change or extension of the Lease’ and the guaranties ‘will not be affected by any change in the Lease, whatsoever’ even if the guarantors were not parties to these changes.” Supreme court granted guarantors’ motion to dismiss the third-party complaint and landlord appealed.
The First Department unanimously affirmed the dismissal and stated:
… because a guaranty must be construed strictly by its terms, a guarantor’s obligations under the lease, and all extensions or renewals simply means a guarantor is responsible for the tenants’ obligations during the initial term of the lease or during the term of the lease as expressly extended or renewed.
In this case, no express extension or renewal of the original lease ever took place. In fact, there was no option to renew or extend included in the December 2018 lease. The 2018 lease therefore effectively expired on August 31, 2019. Moreover, the subsequent two new leases gave no indication that they were “renewal” leases, and the 2020 lease added a new provision relating to early termination, under which [landlord] maintains it is entitled to damages under the guaranties. Under the circumstances, interpreting the guaranties in the strictest manner, we agree with the trial court that the lease signed in 2020 was not an extension of the 2018 lease that would permit [landlord] to recover from … guarantors.
Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP.
This article is for informational purposes and is not intended to be and should not be taken as legal advice.