The Law

Iron-Clad Guarantee by Ron Davis A lease guarantee has allowed a New Jersey shopping center owner to sidestep a complex series of business obstacles and force payment of rent owed by a tenant. The original lease between the shopping center owner and the tenant—Caldor, Inc.—was executed in 1985. At that time, the shopping center—Voorhees Plaza in Camden County—was seeking an anchor tenant, and Caldor was willing to pay the half-million-dollars-a-year rent in return for a 25-year lease. A key provision of that agreement, however, was a guarantee provided by Associated Dry Goods Corp., the parent company of Caldor. That guarantee assured, “unconditionally,” Caldor’s payment of rent. Moreover, the guarantee was to be effective even if the lease were modified or assigned to another party. In fact, the terms of the lease were soon modified when Caldor agreed to change locations to another of the shopping center owner’s properties in Camden County. (Caldor never actually operated a store at Voorhees Plaza.) That property, however, was not secured by an outright sale but was simply a ground lease. Associated nevertheless approved the lease modification. Several months later, the parties entered into a second lease modification, although this time Associated did not acknowledge or sign the modification. Associated later became a wholly owned subsidiary of The May Department Stores Co., which in turn sold Caldor. Caldor then continued to operate a store at the new shopping center location until 1999, despite having declared bankruptcy in 1995. Finally, Caldor closed its store and attempted, without success, to auction its lease. May honored the guarantee obligations and voluntarily paid all Caldor debts owed to the shopping center. Finally, the shopping center owner leased the Caldor store to a third party, but at a substantially lower rental amount than Caldor was paying. The shopping center owner then sued May to force payment under Associated’s guarantee of the Caldor lease. May responded that a guarantee for a commercial lease is not enforceable when the underlying lease agreement is a sublease. In this case, May explained, the shopping center owner was not a property owner but merely a tenant under a ground lease. A New Jersey appellate court pointed out, however, that the change by the shopping center owner from a property owner to a property lessee did not affect Caldor’s obligation to pay rent under the lease. Stated the judges, “Associated expressly agreed under the guarantee that any modification of the lease would not release it from liability or affect the validity of the guarantee.” (Center 48 Ltd. v. May Dept. Stores, 810 A.2d 610 [N.J.Super. A.D. 2002]) Decision: December 2002 Published: February 2003