Faith
and True Christian Center, Inc. entered a commercial Lease with USA Real
Estate-2, LLC, in which Faith leased space from USA for church activities. The
Lease was for five years beginning September 1, 2007. When the Lease was
executed the church’s pastor and president, Anthony Harrison and his wife,
executed a personal Guaranty along with other persons in leadership positions
at the church.
The Guaranties were accepted by USA
Real Estate, after it had reviewed and approved federal and state tax returns
of the Guarantors.
None of the Guarantors had any
ownership interest in Faith; none of them were “commercially sophisticated” as
observed by the circuit court.
In any event, evidently Faith was suffering
from financial problems so Pastor Harrison sought a Lease extension in exchange
for lowering the monthly rental and extending the term for three more years.
Harrison did not seek the consent of the other Guarantors who may have objected
had they known of Harrison’s plan.
Unfortunately, three years after the
Lease was extended Faith was unable to pay the reduced rent. Consequently,
Faith and USA Real Estate agreed that Faith would vacate the property eight months
before expiration of the Lease term.
After Faith vacated, USA Real Estate
asserted a lawsuit against Faith, Pastor Harrison and the other Guarantors. The
claims against Pastor Harrison and his wife were dismissed due to a bankruptcy
discharge. The litigation continued against Steve Carter and the remaining
Guarantors.
At the conclusion of the trial, the
circuit court found that Carter and the remaining Guarantors did not consent to
the Lease extension amendment. And consequently, Carter and the Guarantors were
not liable for rental due under the Lease extension amendment.
USA Real Estate appealed.
The Appellate Court accepted the
evidence that the Guarantors did not know of the Lease extension amendment
until they were sued. And that date was almost four years after the amendment
was executed.
The issue presented to the Court
related solely to the language of the Lease and Guaranty.
The Lease stated that no notice to
the Guarantors is required with respect to an indulgence, modification,
alteration, or accommodation. USA Real Estate focused on the word modification and claimed that a modification is similar to a Lease
amendment.
The Appellate Court looked high and
low for language in the Lease or Guaranty providing for extensions without the
Guarantors’ specific consent. Failing to locate that exact provision, the Court
determined that the terms “Lease modification” and “Lease extension” were
sufficiently different.
The Court then concluded that absent
the formal written consent of the Guarantors to the Lease extension, the Guarantors
could not be liable for rental during the Lease extension period.
Lessons
Learned / Questions Asked:
Stuart A. Lautin, Esq.*
* Board Certified,
Commercial (1989) and Residential (1988) Real Estate Law,
Texas
Board of Legal Specialization
Licensed
in the States of Texas and New York
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