Guarantee the Slice, Pay for the Pie

April 2005

Guarantors beware: you will be liable for more than you wished! A recent Colorado Court of Appeals case, Highlands Ranch University Park, LLC v. Uno of Highwoods, Inc., reminds us of some of the strict legal principles regarding the scope and effect of guaranties.

In this case, a pizza company signed a ground lease to construct a building and lease the premises for twenty years. Upon expiration of the lease term or upon default under the lease, the Landlord was to receive ownership of the building being constructed by the Tenant. The Tenant’s parent company, Uno Restaurants, guaranteed the performance of the Tenant for a “maximum of two years of all rent, monies and charges payable under the lease after default by the Tenant, plus all costs and attorney’s fees in connection with the enforcement of the guaranty.”

Soon after signing the lease, however, the Tenant informed the Landlord that it would not perform under the lease. When the Tenant did not take possession, the Landlord gave notice of termination of the lease, constructed a larger building on the premises and entered into leases with two other tenants. The combined rent for the two new leases was greater than the rent under the original lease that Uno had guaranteed. The Landlord sued the Tenant and Uno for default under the original lease, and the trial court found both the Tenant and Uno liable for the damages as a result of Tenant’s breach for Landlord’s costs and expenses incurred to mitigate its damages and to make the property leaseable to the replacement tenants, plus attorney’s fees. Essentially, the trial court held that because of the broad wording of the guaranty, Uno’s liability was equal to the Tenant’s liability, incurred during the two year limitation.

This case highlights some of the basic principles involved in guaranteeing contracts in Colorado. As with contracts generally, in construing a guaranty, the court is required to give effect to the intention of the parties, which must be deduced from the instrument as a whole. The Court also noted the principle that the language in a guaranty is determinative of the parties’ intent, and its interpretation is a question for the court. Furthermore, the liability of the guarantor is to be strictly construed and reasonably interpreted according to the parties’ intentions, as determined by the surrounding circumstances. Applying these principles in this case, the Court held that the language, “rent, monies and charges payables under the lease during the term thereof,” was not a term of art applying only to the original lease, but instead was a broad obligation and encompassed the foreseeable construction costs required of the Landlord under the lease if the Tenant defaulted.

The moral of this story? Careful negotiation and artful drafting are critical to limiting the scope of your guaranty, or you may well wind up paying for the entire pizza and all the toppings.

This legal update is for informational purposes only as a service to clients and other friends, is not a complete summary of the rules relating to the subject matter discussed above, and is neither to be construed as legal advice nor intended as basis for decisions in specific situations. For more information about this subject matter or other recent developments, please contact the attorneys in our Real Estate practice group or any other attorney in our firm with whom you normally consult by calling (303) 825-4200.