From the desk of:

KEY CONTACT

Howard Manis

Partner

From the desk of:

KEY CONTACT

Howard Manis

Partner

Recourse after a Tenant’s Bankruptcy: Guarantees and Indemnity Agreements in a Commercial Lease

When negotiating a commercial lease, it is important for landlords to protect their rights by ensuring they obtain sufficient security from the tenant. The tenant may provide the landlord with security in the form of a deposit, a letter of credit, a guarantee or indemnity from a third party or some combination of these options. This article will distinguish between lease indemnity agreements and lease guarantee agreements and the corresponding rights landlords will have in situations where the tenant has declared bankruptcy. 

A guarantee is a promise by a third party to fulfil the obligations of the tenant under the lease if the tenant fails to do so. Generally, where a tenant goes bankrupt, the guarantor will be liable to pay the landlord the arrears to the date of the bankruptcy. However, depending on the terms of the lease, the guarantor may not be liable to pay the landlord accelerated rent for the remaining balance of the lease where a tenant has declared bankruptcy. By declaring bankruptcy, the tenant has generally absolved itself of further liability under the lease. The guarantor’s liability is directly related to the obligations of the tenant and, where a tenant has declared bankruptcy, the obligations of the tenant and guarantor pursuant to the lease will come to an end.

In contrast to a lease guarantee agreement, landlords may prefer a lease indemnity agreement for several reasons. In a lease indemnity agreement, the indemnifier will carry out the terms of the lease, irrespective of the tenant’s bankruptcy and obligations under the lease. The indemnifier’s promise to carry out the terms of the lease is not tied to the tenant’s obligations, but rather to the terms of the lease itself. 

A key distinction between a lease indemnity agreement and a lease guarantee agreement is that in the former, the indemnifier assumes primary liability independent of the tenant, whereas in the latter, the guarantor will only assume secondary liability. Lease indemnity agreements also enable landlords to pursue an action against an indemnifier immediately following the tenant’s default under the lease. 

In contrast, a lease guarantee agreement requires that the landlord must first pursue an action against the tenant before seeking recourse against the guarantor. In situations where the tenant has declared bankruptcy, a stay of proceedings may hinder the landlord’s ability to seek such recourse.

The distinction between lease indemnity agreements and lease guarantee agreements was set out in Canadian General Insurance Co. v. Dube Ready-Mix Ltd., where the Court stated: 

“In its widest sense a contract of indemnity includes a contract of guarantee. But, in the more precise sense…a contract of indemnity differs from a guarantee. An indemnity is a contract by one party to keep the other harmless against loss, but a contract of guarantee is a contract to answer for the debt, default or miscarriage of another who is primarily liable to the promisee.”

In order for landlords to best protect and preserve their rights under a commercial lease, obtaining sufficient security from the tenant in the form of a lease indemnity agreement is likely to be the safest choice.

This article is not intended to serve as a comprehensive treatment of the topic and is not legal advice. All legal matters are dealt with pursuant to their specific facts and circumstance. Nothing replaces retaining a qualified, competent lawyer.