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Sublease Pitfall
by Ron Davis

A tenant of a Chicago-area shopping center will have to pay the huge debt that a sublessee owes to the center’s owner.

The shopping center, located in Des Plaines, leased space to the tenant for the operation of a family-entertainment franchise business. Such an operation includes an indoor amusement park that specializes in conducting birthday parties, with rides, games, and a restaurant.

As part of the lease contract, the tenant executed a personal guarantee. In so doing, the tenant agreed, in part, to pay “all rent and other charges” and perform all the terms and conditions of the lease.

Moreover, the tenant promised to pay all expenses incurred by the center’s owner in enforcing all obligations incurred by the tenant. Finally, the tenant agreed that the guarantee is “irrevocable, absolute, present, continuing, and unconditional.”

The tenant eventually assigned and transferred all rights of the lease to another company. That meant the sublessee would become responsible for “all losses incurred as a result of the personal guarantee.” The sublessee also agreed to assume all other obligations of the lease.

Three years later, the sublessee fell behind in paying rent to the shopping center. The center’s owner responded with eviction proceedings. The sublessee then asked for time to acquire the necessary funds to pay the rent, and the center’s owner agreed to the tenant’s request. At no time, however, was the owner of the franchise involved in those negotiations.

The sublessee failed to provide the necessary funding to pay the rent and abruptly moved from the premises. The center’s owner then sued, naming the sublessee and the original tenant as both responsible for the rental debt.

The tenant argued, however, that the sublessee alone was compelled to pay the rent because the rent negotiations between the sublessee and the center’s owner had drastically changed the original agreement. The center’s owner countered by contending that none of the original terms of the lease had changed by any agreements with the sublessee.

A jury found that the tenant must pay $246,588, plus attorney’s fees, to the center’s owner. The jury also found that the sublessee owes a similar amount. The tenant appealed that verdict, challenging the jury’s verdict.

An Illinois court upheld the jury award of damages, explaining that the tenant agreed to personally guarantee all obligations and such a guarantee included those obligations of the sublessee as assignee of the lease. And, the judge added, “where guarantors assent to changes in the contract, the guarantors will not be released.” (Chicago Exhibitors Corp. v. Jeepers! of Illinois, Inc., 2007 WL 2458500 [Ill.App. 1 Dist.])

Decision: September 2007
Published: October 2007



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