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Illinois Court Extends Guarantor Liability To month-To-Month Leases

M. Rosie Rees
Midwest Real Estate News
June 25, 2006

The question of whether a guarantor of a lease continues to be responsible under its guaranty during a holdover tenancy has recently been decided as a case of first impression by the Illinois Appellate Court in Roth v. Dillavou. The Illinois Supreme Court denied an appeal of the Appellate Court’s decision on December 1, 2005.

In the Roth case, David Roth, as landlord, leased a residence in Lisle, Illinois, to Mary Jane Dillavou for a term of less than one year that expired on June 30, 2002. Diane Teal co-signed the lease on behalf of Dillavou, agreeing “to be fully responsible for upholding all covenants of [the] lease,” including making monthly rent payments if Dillavou did not.

Dillavou did not move out on June 30, 2002, but continued to make rent payments until June, 2003, which rent payments Roth accepted. After June 2003, Dillavou stopped paying rent, but continued to reside in the premises.

Roth brought suit against Dillavou in October 2003, to regain possession of the residence and to recover the unpaid rent. Dillavou did not move out until January 14, 2004. Roth then amended his suit to recover past due rent from July, 2003 through January, 2004, from both Dillavou and Teal.

Teal filed a motion to dismiss the suit against her, alleging that she was not liable for any rent that was owed after June 30, 2002, because in her agreement as co-signer she had not agreed to be responsible for any obligations after the end of the initial term of the lease. Since all the unpaid rent was for a period after the initial term of the lease expired, and Teal had not signed any new agreement by which she consented to liability for any period after the initial lease term, she should not be responsible for this rent.

Teal further argued that because the lease stated “in no case shall a holdover tenancy be created” if the tenant retained possession after lease expiration, Dillavou, in retaining possession beyond June, 2002, became a tenant at sufferance with no legal right to be in the premises. Therefore, no valid lease existed for which Teal could be liable.

The trial court granted Teal’s motion to dismiss. The trial court held that Roth’s allowing Dillavou to remain in the premises and accepting rent payments after the lease expired created a novation that converted the lease into a month-to-month tenancy. The trial court construed the month-to-month tenancy as a new agreement between Roth and Dillavou. Teal was therefore released from her guaranty obligations as co-signer under the prior lease, and not responsible for the unpaid rent during Dillavou’s holdover.

The Appellate Court disagreed.

The court began by discussing the differences among a tenancy at sufferance, a holdover tenancy and a month-to-month tenancy. It noted that under Illinois law a tenancy at sufferance arises when a tenant remains in possession after the term of the lease expires. A landlord has a choice to evict the tenant as a trespasser or treat the tenant as a holdover tenant.

The landlord’s behavior will determine whether it has elected to treat the tenant as a holdover tenant. If the landlord accepts monthly rent, it is deemed to have consented to the holdover tenancy on a month-to-month basis, i.e., a “month-to-month tenancy,” which can be terminated upon 30 days’ notice. Further, the court noted that under Illinois law, a month-to-month tenancy is governed by the same terms as the original lease.

The court found that the Dillavou lease expressly provided for a month-to-month tenancy. The lease stated that if the tenant retained possession of the premises after the term expired, then the landlord could either accept further rent payments, “in which case a month-to-month tenancy shall be created,” or sue for possession and recover damages, including lost rent. By accepting monthly rent payments after June, 2002, and permitting Dillavou to remain in the premises, Roth had exercised his right under the lease to consent to the continued possession and create a month-to-month tenancy.

Thus, the court reasoned, Dillavou’s tenancy was not a tenancy at sufferance, and there was no “new” agreement between Roth and Dillavou to which Teal wasn’t bound, but instead, the month-to-month tenancy was a continuation of the original lease under the same terms and conditions.

Acknowledging that there were no Illinois cases that had directly addressed whether a guaranty applied during a month-to-month tenancy, the court found the case of Kagan v. Gillett, which dealt with the question of a guarantor’s liability during a lease extension, substantially similar and persuasive. In Kagan, the court held that where the tenant’s right to extend the term was stated in a rider to the lease, and the guaranty specifically referred to the rider, the guarantor’s agreement to guaranty “all of the lease covenants” included an agreement to guaranty obligations during the extension period.

The Roth court found that, like in Kagan, the holdover provisions in the Dillavou lease were contained in the lease itself, and therefore an express reference in the guaranty to coverage during the month-to-month tenancy was unnecessary to bind the guarantor where the guarantor had agreed to uphold “all the covenants of [the] lease.”

The court also inquired how this issue had been addressed in other jurisdictions and found that there was a split of authority on the issue. Citing two cases from different jurisdictions that illustrated this divergence in opinions, the court was persuaded by the reasoning in the Texas case of GH Bass & Co. v. Dalson Properties-Abilene. The court in Bass held that the guarantor’s responsibility under its guaranty was based not on the nature of the tenancy, but instead was measured by the obligations that the guarantor had undertaken in the guaranty agreement.

Following the lead of the Bass court, the Illinois Appellate Court again emphasized that Teal had agreed to be “fully responsible for upholding all covenants” of the lease.

Since the right of the landlord to accept further rent payments and create a month-to-month tenancy was very clearly stated in the lease, Teal was on notice that she could become responsible for rent payments during a holdover term. By agreeing to be liable for “all covenants” of the lease, Teal had Knowingly agreed to be responsible for rent payments during the month-to-month tenancy. “Once a guarantor is on notice that a month-to-month tenancy may result if the tenant holds over and the landlord consents to the arrangement,” the court held, “the guaranty continues to apply.”

In contrast, the judge writing the dissenting opinion would have held for Teal. The dissenting opinion focused on the meaning of the word “covenant,” arguing that Teal should not be held liable for the rent during the month-to-month tenancy because the landlord’s right to create such a tenancy was not a covenant under the lease.

Rather, the dissent said, the extended tenancy was an arrangement that the landlord and tenant elected after the original lease expired, so Teal should be off the hook.

This case is instructive for Illinois landlords and guarantors. A key factor in the Appellate Court’s decision was that the landlord’s right to create a month-to-month tenancy was very clearly stated as part of the lease, putting the guarantor on notice that the term of the lease, and thus the tenant’s obligations under the lease, could, at the landlord’s election, be extended beyond the original term of the lease.

Also, the guarantor’s obligations were very broad, covering “all the covenants” of the lease. To bind lease guarantors to liability for obligations beyond the original lease term, Illinois landlords should explicitly provide in their leases for a landlord’s election to create a month-to-month tenancy.

Guarantors who want to avoid such liability should include in their guaranty agreements that the guaranty obligation does not extend beyond the original term of the lease, and expressly refuse to accept any responsibility for obligations during any holdover or month-to-month tenancy.

M. Rosie Rees is a partner in the Chicago office of Pircher, Nichols & Meeks, a national full-service law firm.

This article appeared in the June 2206 issue of Midwest Real Estate News. Copyright © 2006 Real Estate Publishing Group.