Exemption of Guarantor in a Lease Contract

Legal Insight

April 2021

George Psarakis LL.M. (mult.), PgCert

(republished from  taxheaven.gr)

Summary: Statement of the reasons for the exemption of the guarantor in a lease contract, in particular where the guarantee of the representatives/shareholders of a capital leasing company was requested to secure payment of the rent. 

It happens several times that the landlord is required by the lessor to provide a guarantee from a third solvent person for the payment of the rent. This is particularly the case when the lessee is a limited liability company (SA, LLC, IKE) and therefore there is no personal liability of the partners/shareholders in the event of the company becoming defaulting. In such cases, the guarantee of the main shareholder or the Manager/CEO is often requested so that if certain rents are ultimately not paid, not only the company but also its "owners", its shareholders or its representatives are liable to pay them. 

When the lease contract is drawn up, the leasing company and its shareholders hope that there will never be a problem with the payment of the rent. Having in any case taken the business risk by investing their capital, they consider it a 'small concession' to put up their personal guarantee for the sake of their company. It may indeed be that the need to call on this guarantee will not arise and everything will run smoothly. However, problems arise when the lessee company becomes insolvent and ceases to pay its obligations, including the rent. In this case, the lessor will not only turn against the lessor company, which may lack substantial free assets, but also against the guarantor(s). What is the position of the guarantor in this case and what are the possibilities of defence? We summarise the following objections to discharge based on the cases we have handled and the case law (for general issues of guarantor discharge see here):

1. Objection to the release of a guarantor

According to Article 862 of the Civil Code, "the guarantor is released if the creditor's fault has made it impossible for the debtor to satisfy the guarantor". The provision for this objection is based on the ancillary and subsidiary nature of the guarantee. As stated in that regard, 'it is in fact in the interest and duty of the creditor in this case to satisfy his claim, in principle from the debtor's property and only in the alternative from the guarantor's property'. This objection may also be raised where, inter alia, the lessor, knowing or, in any event, being slightly or grossly negligently unaware of the deterioration in the lessee's financial situation and the absence of any hope of recovery, neglects for a long period of time to take legal action or to register a charge against the lessee, counting on the guarantor, who is negligent at this stage, as the only certain source of recovery. Moreover, the lessor's fault is reinforced by his breach of his obligation to inform the guarantor of any possible change for the worse in the personal and financial situation of the lessee of which he became, or ought to have become, aware. This is particularly the case where the guarantor does not participate de facto or through legal relations in the lessee's business and therefore cannot have knowledge of the facts (this will of course be rare in the case of guarantees given by members of the board of directors or representatives of the lessee, unless the insolvency occurred after their replacement in the management of the company).

In fact, the Athens Court of Appeal recently issued decision No. 1052/2021 (which was handled by a partner of our office) which accepted a guarantor's claim for release from liability due to the application of Article 862 of the Civil Code. Initially it was held that it became impossible for the lessor company to satisfy the lessee since "it was proved that the primary debtor lessee company became financially weak and became insolvent, which led to its dissolution...". The elements used to prove this insolvency were negative equity, the seizure of equipment by third party creditors and ultimately the dissolution of the leasing company. It was then accepted that the lessor company had all the indications in front of it that would allow it to perceive the forthcoming default by the lessee. It was held that 'in view of all the above, although the plaintiff could, taking into account the previous conduct of the first lessee debtor, foresee its forthcoming financial default, negligently failed to demand the immediate collection of the rent due and, in addition, as stated above, without the knowledge of the guarantor, extended the deadline for the first three rent payments due, with the result that the debt increased to the above amount'. Finally, it was accepted that if the lessor had taken action at an earlier stage, i.e. in good time, it would have been able to satisfy its claims and would not have been able to take final action against the guarantor.  The relevant passage of the judgment reads as follows: "it was proved that the satisfaction of the claim at issue against the first debtor was initially possible, since at the time the rents at issue became due and payable, the latter had sufficient property to do so. In particular, she possessed, inter alia, movable property (desks, cupboards, sofas, chairs, bookcases, tables, telephone sets, household goods, household appliances, telephone sets, keyboards, computers, computer monitors, computer screens, computer speakers, printers, photocopiers, photocopying machines, woodworking machines, toolboxes, machine shop and dyeing tools, unfinished boats, boat engines, speedboats, etc.)...'. The result was the release of the guarantor from a debt of more than EUR 120,000 (for more on the objection to release see here). 

2. Objection of a guarantee limited in time or quantity

The guarantor may have assumed liability for only part of the principal debt (partial guarantee) or up to a certain amount (maximum amount guarantee). He may also have assumed the guarantee for a fixed period of time. That is, in the latter case, not for the entire duration of the lease and any renewals, but for a specific period of time or for the initial agreed period only. It is, however, often a question of interpretation of the guarantee agreement whether it covers the entire period of the lease contract including the period of contractual or statutory extension. E.g. in Supreme Court decision No. 163/2015 the following was held:

"Subsequently, the Court of Appeal, accepting that a question of interpretation of the disputed clause 12.2 of the contract in good faith and in accordance with commercial practice arose, proceeded to interpret it as follows: "The true intention of the parties when drawing up and amending the contested lease was that this clause should apply only during the contractual term of the lease, namely that of six years, a term which not only by implication ... [...] But also a contrario by the aforementioned general 3. 3 clause on the adjustment of the rent, which also provides for it in the event of a compulsory extension of the lease, it is clear that the contested clause does not apply in the case of such an extension, which the parties provided for and yet did not make any provision for it in clause 12. (2) Consequently, and since the defendant terminated the impugned lease after the expiry of the contractual period, the security deposit of 100,000,000/- (as adjusted during the term of the lease) was not forfeited in favour of the plaintiff nor did the contract give rise to its claim for compensation equal to 10 monthly rentals." Therefore, the wording of the guarantee agreement, the words and phrases used i.e. and the context in which the guarantee was given are of particular importance so that we can interpret the actual intention of the parties.  

3. Lack of liability for compensation for use

If the lease contract is terminated or the term of the lease expires, the lessee no longer owes rent but compensation for use (which compensation is equal to the agreed rent). It is also accepted that the contract of guarantee must be interpreted strictly and in doubt in favour of the guarantor. Furthermore, this claim of the lessor for compensation for use is a claim based on a pre-existing lease contract, but it is based not on that contract, but on the fact of the unlawful retention of the leased premises after the expiry of the lease and the obligation to pay compensation arising from that breach. Consequently, where the guarantor has guaranteed the tenant's obligations arising from the lease contract, in particular the timely payment of the rent, but not the obligations arising from the law, such as the aforementioned claim for compensation for use, which arises after the expiry of the lease contract, he is not liable for the latter obligation of the first-debtor-tenant towards the landlord (see the judgment of the Court of First Instance of the European Communities in the case of the landlord-tenant, cited above, paragraph 1). 711/2019 of the Single Member Court of First Instance of Thessaloniki). 

4. Amortization of Security Deposit due to Renewal of Lease Contract

According to the provision of Article 851 of the Civil Code, the guarantor is liable for the extent of the principal debt. This is consistent with the ancillary nature of the guarantee contract in relation to the principal debt, in the sense that the guarantor is liable for the extent, i.e. the existence and subject matter, of the principal debt, provided that it is not increased by a subsequent agreement between the creditor and the principal debtor. Thus, for example, the guarantor is not bound by an agreement between the landlord and the tenant - to which he does not contribute - to shorten the time for repayment of the debt, since in this case his liability is increased without his having agreed to it. 

The guarantor is also discharged if the lessor and the lessee attempt to amend the main lease contract to such an extent that essential terms of the lease are modified. Such a term is, for example, one which refers to the type of benefits due on both sides. It is clear that, where the essential terms of the lease contract are changed, there is no longer a simple modification of an existing contract, but a new contract is drawn up, with the inevitable result that the guarantor is discharged by the extinguishment of the principal obligation and is not liable, as a non-party third party, for the new contract drawn up. 

Therefore, if an amendment to a lease contract modifies the basic terms of the original contract, the amendment cannot be regarded as a mere continuation of the original lease, but is clearly a new contract from the outset, with an agreement on the essentials and otherwise with possible reference to the terms of the previous contract. This reference - if contained in the new contract - is obviously made for the sake of brevity, with the result that the latter contract is in fact a renewal of the original contract, replacing it in its entirety. And since the new contract does not include the signature of the guarantor, the latter is no longer bound by his guarantee (because the original obligation has been extinguished).

E.g. in decision No 766/2004 of the Piraeus Court of Appeal the following was held: "The content of the private agreement of 19-1-1999 proves that there was no compulsory extension but only a renewal of the lease contract concluded by the private agreement of 15-1-1996, since the basic terms of the original lease were modified, such as the duration, the rent and the tenant's right to leave the premises without the obligation to pay rent until the end of the lease. Renewal of the opponent's guarantee liability did not occur because its consent to this by consent the approval should have been in writing (see Georgiadis-Stathopoulos Civil Code under art. 439, point 4) and the private agreement of 19-1-1999 proves that the opponent is not a party to it and has not signed it. Therefore, since the claim of the respondent did not arise within the period from 1-1-1996 to 31-12-1998 for which the opponent guaranteed payment of rentals but after that period, the opponent has been released".

5. Objection of abuse of rights (Article 281 of the Civil Code)

Finally, the guarantor may also be able to raise an objection of abuse of rights (Article 281 of the Civil Code). Although this objection is particularly difficult to uphold because it requires the fulfilment of conditions that are usually difficult to meet, it is a solution in certain cases. For example, it has been held in a relevant court decision that the fact that the landlord waits a long time before taking collection measures against the tenant gives rise to an objection of abuse of rights against the guarantor, when the latter is asked to pay the debt, which has now ballooned. A passage from that judgment is quoted: 'But in so doing, that is to say, while her claim was precarious and without ascertaining whether she could secure her claim from the first defendant, since she could foresee his financial weakness, taking into account his previous conduct, when the original debt was only 3. 687.96, she allowed the amount of the claim to swell to EUR 71,532.00 by failing to terminate the lease contract in dispute and inform the other defendants. This conduct of the plaintiff fulfils the requirements of Article 281 of the Civil Code, since, in abuse and in breach of good faith and fair dealing, it ignored the financial weakness of the first defendant and disregarded the detrimental effects on the heirs of the guarantor, choosing to satisfy its claim in the action, with the result that the above action became particularly burdensome for the defendants in question" (no. 3018/2016 judgment of the Thessaloniki Single Judge Court of First Instance)).