When is a default not a default

"Under form lease guarantee that states that guarantors obligations
will terminate if the tenant is not in default during the first three
years of lease, tenant will not be regarded as in default if it
habitually pays rent within a 20 day grace period following due date
if landlord consistently accepts such payment without objection.
Madison Avenue Leasehold, L.L.C. v. Madison Bentley Associates,
L.L.C., 811 N.Y.S. 2d 47 (N.Y. App. Div. 2006)
The lease was the Standard Form of Store Lease published by the Real
Estate Board of New York, Inc. Presumably the guarantee came from
the same source, although we're not told.
The guaranty stated that the guarantors were relieved of their
guaranty if the tenant
`…shall not have been in monetary default... at any time during the
first three years of the lease.'
Tenant routinely paid rent late, but within 20 days of the due date.
The default language, which the court correctly notes is not a model
of clarity on the issue of when a default occurs, read as follows:
`If tenant defaults in... the covenant for the payment of rent... and
if tenant shall not have diligently commenced curing such default
within such twenty (20) day period... then owner may serve a written
three (3) days notice of cancellation of this lease upon tenant.'
Tenant quit the lease three years and three months following
commencement. After three years, the rent subsidy that tenant was
receiving from the manufacturer of its Bentleys, Rolls Royce,
expired. Likely all those Bentley cars on the showroom floor did not
belong to tenant, and there wasn't any money to pay the default
damages. Obviously, the fight was about whether the guarantee had
been released.
The court acknowledged, as the dissent asserted, that it was likely
that the failure to pay rent on the original due date ought to be
regarded as a default. But it held that the landlord's consistent
pattern of accepting late payments without comment constituted a
waiver of its right to declare a default.
The landlord noted that the concept of waiver usually occurs in an
equitable context. Here, there was solely a suit for damages, not
forfeiture of the leasehold estate, as the tenant had abandoned. But
the court responded that waiver analysis is appropriate both for
legal and equitable disputes.
Of course, the fact that landlord had waived its right to enforce the
default provisions of the lease as a consequence of the late payments
didn't necessarily mean that tenant hadn't defaulted for purposes of
the guarantee release. In fact, the default clause appears to say
that failure to pay on time is a default. But the court, despite the
fact that it claimed that waiver is appropriate in a legal context,
used the waiver here as a kind of estoppel of the landlord's right to
assert that the late payments were defaults.
Having failed, over the course of three years, to give Bentley any
notice that timely payment of rent would be required, landlord may
not now insist that the tenant's failure to strictly comply with the
timely payment condition of the lease constitutes a default.
The court viewed its interpretation as necessary to the well being of
the law in light of the facts that the lease was a standard form
lease and that its interpretation was, in its view, reflective of the
probably intent of these parties and the market in general in the
interpretation of the document.
Landlord attempted a second ploy: the anti-waiver language in the
guarantee itself. The guarantee stated that the individual
defendants obligations shall in no way be terminated, affected,
diminished or impaired by reason of the failure to assert rights or
remedies reserved to Landlord [under the Lease]. Further, the
guaranty provided that the guarantors' liability shall in no way be
affected by reason of any extension of time that may be granted by
Landlord to the Tenant. Landlord pointed out that the alleged waiver
that prevented it from asserting that Tenant had defaulted during the
first three years arose from an extension of time.
The court disagreed, and said that the language of the guaranty did
not cure the problem with the establishment of the condition
precedent to the guaranty being in effect - the lack of a default
within the first three years. The editor will try to explain the
majority position, which seems quite clear to it, simply by quoting
the language of the opinion:
Once waived, the default in timely payment of rent is extinguished
and cannot later be revived, like a phoenix, into a material default
for the purpose of extending the period of the collateral guaranty.
This waiver analysis ignores the economic realities of the lease in
light of the guaranty. The guaranty effectively shifted the ultimate
risk of tenant's non performance of the obligation to make rent
payments from [Landlord] to the [guarantors.]
Accordingly, [Landlord] had no economic reason to notify [tenant] of
[tenant's] own habitually late payments during the very period in
which [landlord] allegedly waived its rights by failing to do so. To
insist on pain of waiver that [landlord] formally advise [tenant] of
what it already knew makes little sense. On the facts of this case,
in particular, that the [guarantors] are [tenant's] principals, the
waiver analysis is all the more confounding, for it reduces to this:
[Landlord] waived the rights it bargained for under the guaranty by
failing formally to belabor the obvious both to [tenant] and
[guarantor.]
The Judge was perfectly willing to concede that the Landlord might
have waived its rights against Tenant to terminate the lease for late
payment of rent. But, he asserted, this does not mean that Landlord
ever waived its right to assert against guarantors that a default had
occurred.
Comment from DIRT's Moderator Patrick A. Randolph, Jr., Elmer F.
Pierson Professor of Law, UMKC School of Law, Of Counsel: Blackwell
Sanders Peper Martin, Kansas City, Missouri
Usually, waiver arguments are used to support a claim that the party
asserting waiver was `lulled into a false sense of security' by the
other sides failure to assert its rights. But that didn't happen
here. Exactly what would the guarantors have done differently had
they known that the landlord regarded late payment of the lease as a
default, and no joking around? Made sure all payments were on time
after the first late payment? This wouldn't have mattered - the
first late payment cost them their three year `out'. Defaulted
sooner? This would only have exposed them to more liability? Done
something to the tenant? What? [In fact, it appears that they were
the tenant in other clothing.) The opinion is wrong. Let's see if
there's an appeal. The case was decided March 14, 2006."

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