Lease Guarantors Beware – Traps for the Unwary

The Third Circuit has just issued a non-precedential ruling under New Jersey law reminding us how naked a naked lease guarantor can be, and how careful we have to be when reviewing "form" lease guaranties. In G&S Livingston Realty, Inc. vs. CVS Pharmacy, Inc., CVS was the guarantor of a lease in which the retail tenant had gone into bankruptcy and rejected the lease. Of course, absent other information, CVS would stand behind the obligations of the bankrupt retail tenant. In this instance, the retail tenant had options and rights under the lease which CVS as an ordinary guarantor was not able to take advantage of.

In this case, under the lease the tenant had rights in the event the landlord failed to meet a co-tenancy obligation (i.e. an obligation to keep certain other specified tenants in occupancy). The tenant had both the right to pay alternative minimum rent based on its actual sales if Landlord did not meet a co-tenancy obligation for a certain period of time and, if the failure to meet the co-tenancy obligation continued for a longer specified period of time, to terminate the lease.

It was undisputed that the landlord did not satisfy the co-tenancy requirement. CVS argued it should only have to pay the alternative minimum rent after the landlord failed to meet the co-tenancy obligation, and to terminate the lease and accordingly pay no rent after the landlord’s failure to meet the co-tenancy requirement continued for the period of time entitling tenant to terminate. The Court ruled that the guarantor, because it is neither a party to the contract nor a third party beneficiary thereof, is not entitled to the benefit of either of these protections. So even though the landlord had failed to maintain the required co-tenancy and the tenant (without any regard to the tenant’s ability to pay) would have first paid reduced rent and then (if it terminated) no rent, the guarantor must pay full rent for the entire lease term.

The lesson is clear – if the guarantor is to have the benefit of these tenant protections that benefit has to be expressly documented.

Shepard A. Federgreen is a Director in the Gibbons Real Property & Environmental Department.

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