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Guarantors of Commercial Lease Are Liable Even After Lease Changes Hands, First District Rules

 

As Naperville, Oak Brook, Wheaton, and Chicago business trial lawyers with substantial experience in shopping center claims, we were interested to see a recent decision by the First District Court of Appeal on the obligations of people who guarantee a lease. A change in the lease and a directed verdict at trial do not relieve a couple of their liability as guarantors of a commercial lease, the court has ruled. In Chicago Exhibitors Corporation v. Jeepers! Of Illinois and Swento, 1-06-3313 (Aug. 30, 2007), the court ruled that a guaranty agreement written to survive changes to the lease is enforceable even if the lease is assigned to a new tenant who changes it without the guarantor’s approval.

Harvey and Cherry Swento owned a business that leased space from a predecessor landlord to Chicago Exhibitors Corporation (CEC). To sweeten that lease, the Swentos in 1991 personally guaranteed their lease payments and all of their other obligations as tenants, with a clause specifying that the guaranty would survive changes to or assignment of the lease. In 1997, they sold their business to Jeepers! of Illinois, Inc. and executed an agreement in which Jeepers! indemnified them from losses stemming from their personal guaranty. Jeepers! then failed to pay its rent, causing CEC to demand an amendment to the lease that reaffirmed the Swentos’ personal guaranty. CEC declined to recognize the transfer of lease obligations from the Swentos’ company to Jeepers! until rent was paid in full and Jeepers! executed its own guaranty.

Jeepers! never did take on the guaranty, but it failed to pay its rent again several times. In an effort to avoid eviction, it agreed to several changes to the lease in January of 2001. The Swentos did not sign this amendment, even though it called for the ratification of all guarantors. When CEC eventually sued Jeepers! for unpaid rent and repairs, it included the Swentos as guarantors. In the trial, the Swentos asserted that the January 2001 amendment was a material change that discharged them from their obligations as guarantors; CEC successfully moved in limine for a ruling that it was not. The parties then agreed to move straight to the damages phase of the trial, so the judge granted a directed verdict on liability. The Swentos were eventually found liable for unpaid rent and damages as well as attorney fees. They appealed the in limine motion, the directed verdict and the award of attorney fees.

In its decision, the appeals court found that the January amendment to the lease was not material enough to release the Swentos from their obligations. In Illinois, changes to a contract must make the guarantor’s obligations materially different from what they originally signed, including a substantial increase in risk. None of the changes in the amendment changed the Swentos’ financial obligations, the court said, so it was not a material enough change to release them from their guaranty. Nor was the Swentos’ lack of control over Jeepers! enough to constitute an increase in risk, especially since their original guaranty was written to endure despite changes in the lease.

The Swentos also argued that a directed verdict denying them a chance to defend themselves was inappropriate because they never signed the January 2001 amendment, which they argued superseded the lease and thus waived CEC’s rights against them. The court found those arguments unconvincing, but more importantly, pointed out that they are waived on appeal because the Swentos failed to raise them at trial. Finally, the appeals court rejected the Swentos’ argument that they shouldn’t be held responsible for an agreement they didn’t sign, again saying that the January 2001 changes to the lease were not material enough to release them from their obligations. Thus, the trial court’s decision was unanimously affirmed.

With offices in Chicago and Oak Brook, Ill., DiTommaso-Lubin handles commercial real estate litigation of all kinds, including a variety of contractual disputes and shopping center tenant matters. If you have a legal problem regarding a shopping center or another real estate matter, we would like to help. To set up a confidential consultation with our Chicago business and real-estate trial attorneys, please contact our Oak Brook business and real-estate trial attorneys today.