GUARANTORS AND THE LEASE RENEWAL

In these tough economic times, property managers have a vested interest in working together during the application approval process. As occupancy rates decrease, and the pool of applicants with strong credit histories shrinks, creative leasing tools must be utilized by property managers. One such tool is allowing the applicant to obtain a guarantor in order to pass the lease approval process. It is usually cut and dry that the guarantor of an initial lease term can be held responsible for the rent during the term of the lease. However, as you will see, the law may not be on the side of the manager who is attempting to enforce a guarantee agreement for any lease extension or renewal term.

 

What are Guarantee Agreements?

 

The typical guarantee agreement involves somebody who agrees to be responsible for the financial obligations of a resident, including the rent as provided under the lease. This person is known as the guarantor. The guarantor is usually not listed on the lease as the resident or occupant of the apartment. Often, but not always, the guarantor is a close relative such as a parent or uncle. If the resident fails to pay rent, the manager has recourse against the guarantor and can recover money damages owed to the manager by the resident.

 

Are Guarantee Agreements Enforceable?

 

Florida courts enforce guarantee agreements if the document is worded correctly. While the promise of one person to meet the financial obligations of another is allowed in Florida, the agreement must be in writing according to Sec 725.01 of the Florida Statutes. Therefore, never believe that an oral guarantee agreement will be enforced by a judge, because it will not!

 

How Should the Guarantee Agreement be Worded?

 

Be very specific. Courts attempt to look at what the intentions of the parties were at the time of entering in to the contract or agreement. Since it is usually the manager that has drafted the agreement, any ambiguity in regards to the terms of the guarantee will be construed against the manager. What does that mean? If the terms of the agreement are vague enough that there could be multiple meanings, then the resident will “get the benefit of the doubt,” and the court will likely enforce the resident’s belief as to the meaning of the disputed term. Among other things, you should list the names of the parties, reference the lease that the guarantee applies to, and of course the guarantee agreement should spell out in detailed fashion the obligations for which the guarantor will be responsible.

 

The Lease Renewal Scenario

 

Bob moved to your apartment community ten years ago from Kansas in order to attend college. Bob, like most college students, was short on cash at the time. Based on his situation, he was advised that he needed to obtain a guarantor in order to have his rental application approved. Lucky for Bob, Uncle Jeb agreed to be the guarantor. As it turns out, Bob was timely in making all of his rental payments for the first nine years and ten months of his tenancy. Bob failed to make his final two rent payments and hopped on a plane for Jakarta, Indonesia, never to be heard from again! You decide to go after Uncle Jeb for the balance of the rent owed by Bob. Uncle Jeb is upset and does not believe that he should be held responsible for nine renewal terms, and claims he should have been notified of each renewal transaction. Your regional manager receives an email from Uncle Jeb’s attorney threatening legal action.

 

Is Uncle Jeb Responsible Under the Guarantee Agreement for the Lease Renewal Term?

 

The answer to the above question will depend on how the guarantee agreement was worded. Under Florida law, a guarantee for a lease can be continuing, but it must expressly state that it is intended to cover future transactions for the guarantor to be liable for extensions and renewals. The terms should contemplate a future course of dealing during an indefinite period. If the above conditions are met, the manager would not have a legal duty to notify the guarantor of each transaction between the manager and resident, provided that the particular transactions fall within the description of the terms of the guarantee agreement. Therefore, if there is no mention of the lease renewal in the guarantee agreement, then Uncle Jeb would not have liability in the above fact pattern, because the agreement did not expressly state that he would be responsible for the renewal terms.”

 

Is Uncle Jeb Financially Responsible if the Lease Guarantee Agreement Specifies That it Applies to Lease Renewals?

 

As a general rule, if the renewal period mirrors the lease term in every manner, then the guarantee would be enforceable against the guarantor, if the agreement specified that the agreement applied to renewal terms. However, if the renewal lease contains different provisions other than the original lease term, a court may not enforce the guarantee agreement. For example, if the rent has been increased during the renewal term, the court may possibly hold that the lease is not a true “renewal lease”, because not all of the terms were “renewed”. Instead the court may treat the “renewal” lease as a new lease, thereby extinguishing the obligations of the guarantor. The court may refuse to enforce the guarantee agreement in that situation, on the premise that the guarantor never intended to be liable for the higher rent amount. It is possible that a court may enforce the guarantee, if the terms expressly state that the guarantor will remain responsible for any changes, renewals or amendments to the lease that would increase the guarantor’s risk, such as rental increases.

 

The main point is that courts really prefer to err on the side of caution if the terms of a guarantee agreement are ambiguous and are reluctant to hold the guarantor liable.

 

What Do We Recommend?

 

Our firm’s recommendation is both very practical and very simple!

 

You should update each guarantee agreement for each renewal or lease extension period. Have the guarantor sign again, so that it is clear as to exactly what his financial obligations are to you.

If you really are banking on the guarantor to pay you, it would be risky to leave it in the hands of the courts, when you have the ability to firm up your guarantee agreement by updating it each renewal or lease extension period.