The Leasing Hotline

Walnut answered the complaint with a bankruptcy defense: Because its trustee did not elect whether to assume or reject the lease, the lease was deemed terminated as of approximately August 1994 (60 days after the commencement of the June 1994 bankruptcy action). McLaughlin moved for summary adjudication of the bankruptcy defense.

The trial court held that under a new line of bankruptcy cases, the rejection of the lease resulted in a breach, rather than a termination, of the lease. The appellate court affirmed. It adopted the emerging view that a rejection of an unexpired lease is no more than a breach and does not terminate the lease. It considered the “plain language” of Section 365 of the Bankruptcy Code that uses the terms “breach” and “termination” as though they had different meanings and that Section 365 specifically states that the rejection of a lease is a breach. It noted that there were certain exceptions to this rule that did not apply under the McLaughlin/Walnut circumstances, and that McLaughlin was entitled to unpaid rent with interest and penalties through March 1998, when possession of the land was returned.

GUARANTY OF RENT

A contract to pay rent for the term of a lease in a highly detailed lease termination agreement is not a guaranty where the lease termination agreement is unambiguous and where the tenant's obligation to pay rent is designated as primary over any third-party payments, even if the lease termination agreement uses the language “Tenant guaranties … . “ Equifax, Inc. v. 1600 Peachtree, L.L.C., A04A0042, A04A0043, Court of Appeals of Georgia, First Division, June 29, 2004.

In 1994, the landlord (1600 Peachtree) and Equifax entered into a 15-year lease. In 1997, Equifax and the landlord negotiated a lease termination agreement that committed Equifax to payment of rent throughout the rest of the lease term. The parties agreed that Equifax would be responsible for the full amount of the rent, less any rent received by third parties. In 1999, the landlord entered into a lease with iXL Enterprises for a portion of the Equifax premises, and the landlord and Equifax entered into an amended lease termination agreement designed to accommodate iXL. Equifax was still responsible for the full payment of rent (less any rents received by third parties) for the full term of the original lease under the amended lease termination agreement. Thereafter, iXL failed to pay timely rent, and the landlord eventually released iXL from the lease in exchange for a one-time payment of $1.8 million. Thereafter, in November 2001, Equifax notified the landlord that it no longer owed any monies to the landlord, and the landlord commenced an action against Equifax. Equifax argued that the amended lease termination agreement was actually a guaranty that permitted it to avail itself of the statutory protections afforded to guarantors.

After a trial, the court held that the amended lease termination agreement was not a guaranty, and the appellate court affirmed. It held that there was no indefiniteness or ambiguity because the amended lease termination agreement delineated the financial obligations between Equifax and the landlord. Under the lease termination agreement, Equifax agreed to compensate the landlord for the difference between any rents received from third parties and the amount to which the landlord was entitled under the original lease. The court held this obligation existed regardless of whether the iXL lease or any other third-party lease was terminated. The court did not find compelling the argument by Equifax that language contained in the lease stated “Equifax guaranties … ” because the contract read as a whole showed that Equifax's obligation to the landlord was primary over any third-party payments.

REJECTION OF LEASE

Under emerging California and federal law, the rejection of a lease after filing for bankruptcy may be a breach of the lease, rather than a termination. McLaughlin v. Walnut Properties, Inc., No. B165538, Court of Appeal of California, Second Appellate District, Division Eight, June 10, 2004.

McLaughlin owned two parcels of land. In 1992, McLaughlin entered into two 20-year ground leases with Walnut Properties so that Walnut Properties could build a multiplex theater on the land. George Tate guaranteed the leases. By 1994, Walnut was behind on its rent, and McLaughlin sued. In June 1994, Tate and Walnut filed for bankruptcy. Tate died in 1995, and the bankruptcy cases were dismissed in February 1996. Walnut then made various attempts to keep the multiplex project, including investment plans and bank loans. By December 1997, McLaughlin had not been paid any rent for 6 months and sued Walnut and Tate's estate in California state court for the unpaid rent. McLaughlin stated that Walnut no longer had possession of the land as of March 1998, when he was notified by Walnut that Walnut no longer had an interest in the land.

Walnut answered the complaint with a bankruptcy defense: Because its trustee did not elect whether to assume or reject the lease, the lease was deemed terminated as of approximately August 1994 (60 days after the commencement of the June 1994 bankruptcy action). McLaughlin moved for summary adjudication of the bankruptcy defense.

The trial court held that under a new line of bankruptcy cases, the rejection of the lease resulted in a breach, rather than a termination, of the lease. The appellate court affirmed. It adopted the emerging view that a rejection of an unexpired lease is no more than a breach and does not terminate the lease. It considered the “plain language” of Section 365 of the Bankruptcy Code that uses the terms “breach” and “termination” as though they had different meanings and that Section 365 specifically states that the rejection of a lease is a breach. It noted that there were certain exceptions to this rule that did not apply under the McLaughlin/Walnut circumstances, and that McLaughlin was entitled to unpaid rent with interest and penalties through March 1998, when possession of the land was returned.

GUARANTY OF RENT

A contract to pay rent for the term of a lease in a highly detailed lease termination agreement is not a guaranty where the lease termination agreement is unambiguous and where the tenant's obligation to pay rent is designated as primary over any third-party payments, even if the lease termination agreement uses the language “Tenant guaranties … . “ Equifax, Inc. v. 1600 Peachtree, L.L.C., A04A0042, A04A0043, Court of Appeals of Georgia, First Division, June 29, 2004.

In 1994, the landlord (1600 Peachtree) and Equifax entered into a 15-year lease. In 1997, Equifax and the landlord negotiated a lease termination agreement that committed Equifax to payment of rent throughout the rest of the lease term. The parties agreed that Equifax would be responsible for the full amount of the rent, less any rent received by third parties. In 1999, the landlord entered into a lease with iXL Enterprises for a portion of the Equifax premises, and the landlord and Equifax entered into an amended lease termination agreement designed to accommodate iXL. Equifax was still responsible for the full payment of rent (less any rents received by third parties) for the full term of the original lease under the amended lease termination agreement. Thereafter, iXL failed to pay timely rent, and the landlord eventually released iXL from the lease in exchange for a one-time payment of $1.8 million. Thereafter, in November 2001, Equifax notified the landlord that it no longer owed any monies to the landlord, and the landlord commenced an action against Equifax. Equifax argued that the amended lease termination agreement was actually a guaranty that permitted it to avail itself of the statutory protections afforded to guarantors.

After a trial, the court held that the amended lease termination agreement was not a guaranty, and the appellate court affirmed. It held that there was no indefiniteness or ambiguity because the amended lease termination agreement delineated the financial obligations between Equifax and the landlord. Under the lease termination agreement, Equifax agreed to compensate the landlord for the difference between any rents received from third parties and the amount to which the landlord was entitled under the original lease. The court held this obligation existed regardless of whether the iXL lease or any other third-party lease was terminated. The court did not find compelling the argument by Equifax that language contained in the lease stated “Equifax guaranties … ” because the contract read as a whole showed that Equifax's obligation to the landlord was primary over any third-party payments.