How Solid is Your Rent Guarantee?
Posted in Real Estate

A recent case from the BC Supreme Court has highlighted yet again that a guarantee or indemnity of a lease (here now referred to as an “Indemnity”) does not necessarily assure payment to a landlord following a default by a tenant.  The terms of the Indemnity must be carefully scrutinized and examined to determine if the specific circumstances outlined in the document are engaged in order for a call to be made on the indemnifier.  A landlord cannot simply assume that because it obtained an Indemnity, it will be made whole if the tenant defaults in payment of rent or otherwise is in default of the lease.

In 848 Courtney Street Holdings Inc. v. JED Enterprises Ltd., 2014 BCSC 2301, a commercial landlord made a claim against a defaulting corporate tenant and its indemnifiers.  The corporate tenant was a shell company that had been established by its principals who happened to be lawyers.  It had no assets and therefore judgment was allowed to be taken against it.  The real dispute was whether the indemnifiers, the lawyers who had been carrying on their law practices from the leased premises, were liable on the Indemnity which they had provided at the outset of the landlord/tenant relationship.  The lease was initially entered in 1999 and had been renewed on two occasions.  At the time of default, there were still 38 months left on the latest term of the lease.  The court outlined the issue before it in these terms:

In the alternative, the landlord seeks damages from the lawyers pursuant to the terms of the indemnity. The damages sought under the indemnity are lower, as the indemnity was limited to 30 months, and the landlord says at the time of the breach, there were 14 left of the 30 months. The landlord also seeks its solicitor and client costs pursuant to a separate term of the indemnity agreement.

The defendants respond to this claim by saying that the indemnity operated for the first 30 months of the first lease term only, and was not renewed or revived each time the lease was renewed or replaced.

Before examining the terms of the Indemnity granted in the case, the court addressed very technical arguments raised by the landlord that the lawyers ought to be liable for the corporate tenant’s default regardless of the indemnity.  Those arguments were rejected and so the landlord was left with making its claim based on the wording of the Indemnity.  The terms of the Indemnity were very ‘landlord friendly’ in that, for example, the lawyers had provided an absolute and unconditional guarantee of payment of rent regardless of a variety of circumstances that may arise.  It was crafted in a way to avoid and address many defences to guarantee or indemnity claims that have evolved over the years.  In other words, based on a superficial reading of the Indemnity in question, it seemed as if the defendant lawyers may have had an uphill battle in defending the landlord’s claims.

However, the case turned on one clause of the Indemnity which provided for a limitation of liability.  The limitation clause provided that the indemnifiers would not be liable for rent accruing due after the 30th month of the term of the Lease.  The first term of the Lease had clearly expired but, as mentioned, the Lease had been renewed on two occasions.  Therefore, the issue was whether the renewal of the Lease also resulted in the restarting of the clock on the 30 month period provided for in the Indemnity.  The parties had been silent and did not address the issue at the time of the two renewals.  The problem the landlord faced was that most of its arguments regarding how the terms of the various documents ought to be interpreted were reliant on the wording of the Lease itself.  The court concluded that because the indemnifiers weren’t party to the Lease and the Indemnity was not included as part of the Lease, the landlord was unable to rely on the lease as an interpretive aid.  As a result, the court found that based on the plain wording of the Indemnity in question, it only was in existence for the first 30 months of the lease and thereafter the Indemnity was no longer in effect even though the lease had been renewed.  The landlord’s claims were therefore dismissed as against the indemnifiers.

This case is another good example of ensuring that when an Indemnity is sought by a landlord in order to support a lease and provide further security for payment of rent, its terms ought to mirror and in fact reflect the business terms that have been agreed upon.  Also, when a lease is renewed, both landlord and tenant will be well served to review the terms of any Indemnity and to either confirm the Indemnity continues or needs to be modified in some respect to once again capture the business terms of the transaction.  Failure to review the terms of any Indemnity at crucial times during the landlord/tenant relationship may result in expectations not being met.  As the old saying goes, the Indemnity “may not be worth the paper it is written upon.”

Tags: Indemnity

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