By Jones Osborn II

Leases are often guaranteed by an individual or by a parent company of the tenant. Such guarantees are very important to the landlord and his lender, especially if the tenant is a shell corporation or has a limited net worth.

What happens when a lease is amended without the consent of the guarantor? The general rule is that the guarantor is released. There are two exceptions: (a) when the amendment does nothing more than to extend the time the tenant has to pay a monetary obligation, or (b) when the amendment is of a sort that can only be beneficial to the guarantor.

Extension of Time. The law does not require the guarantor's consent if the only modification is to extend the time to pay money, even though the guarantor may prefer that the extension not be granted. Under the law, it's something the guarantor must accept, whether he likes it or not.

Beneficial to Guarantor. This one is slightly trickier. The basic idea is that if the amendment reduces the obligations of the tenant, the guarantor's consent is not necessary because the guarantor's contingent obligations are also reduced. However, the amendment must be of such a nature that there is nothing about it that might be construed as being worse for the tenant, and thus the guarantor.

A recent case furnishes an example. A landlord and a tenant agreed to reduce the amount of leased space in a shopping center and also agreed to a corresponding reduction in the rent. This would normally seem to be the kind of amendment that would not be of concern to a guarantor, because the amount of rent he might be called upon to pay has been reduced. However, the smaller space resulted in the loss of frontage facing a major road. When the tenant later went broke, the landlord sued the guarantor. The guarantor defended by saying that he hadn't consented to the amendment, and therefore should be released from his guarantee. There was conflicting testimony as to whether the loss of the frontage was a detriment.

The court released the guarantor because it was possible under some circumstances that the reduced frontage might be a detriment. In other words, the court held that if it is possible that the amendment could be disadvantageous under any possible set of circumstances, then the guarantor is completely released from his guarantee unless he consented to the amendment.

Other Applications. This rule is not limited to the guarantee of a lease--it applies to guarantees of virtually any kind of obligation, including promissory notes, contracts, and agreements of all kinds. Whenever the underlying contract or obligation is changed in any way, there is the possibility that the guarantor could be released. The only exception to the general rule is where the guarantor is a "compensated surety." This is generally a bonding company or insurance company which guarantees an obligation for a fee or premium. In this case, the guarantor can still be released if the guaranteed obligation is changed without his consent, but the rules are a little tougher and a little more complicated.

The Lesson. If you are a landlord (or if you are a lender to a landlord relying on his leases for security), the best rule is to always get the guarantor's consent when you agree to a lease modification, extension or renewal because you don't want to risk an inadvertent release of the guarantor. The courts are protective of guarantors, and will often search to find ways to release them from their obligations.

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The case referred to above is Indian Village Shopping Center Inv. Co. v. The Kroger Co., 140 Ariz. Adv. Rep. 16 (May 26, 1993).