Seller of business successfully sues buyer for failure to get personal lease guaranty release

Sellers, husband and wife, owned Target, which operated a wine business in Round Rock, Texas (greater Austin area). Target operated out of leased shopping center space. On December 30, 2009, Sellers sold Target to Buyer, effecting the sale through a membership interest purchase agreement, which transferred the lease to Buyer.

That same day, in accordance with the terms of the lease, Sellers sent a letter to the landlord notifying it about the proposed assignment of the lease. In the letter, Sellers agreed to continue the personal guaranty of performance under the lease that Sellers had executed when Target first entered the lease in 2005. The letter was signed by Sellers and Buyer.

Buyer promised in the purchase agreement that Buyer would not extend the term of the Target shopping center lease, without obtaining a release from the landlord of Sellers’ personal guaranty of Target’s obligations under the lease. The purchase agreement went on to say in effect that Sellers would not have done this deal without Buyer’s lease extension promise.

In February 2011, Buyer, as owner of Target, and the landlord extended the shopping center lease term for one year. Buyer did not obtain a release or termination of Sellers’ personal guaranty of the lease obligations from the landlord. In 2012, Buyer and landlord extended the lease until January 2015. Buyer again did not obtain a release or termination of Sellers’ personal guaranty of lease obligations from the landlord.

In 2012, according to Sellers, or 2014, according to Buyer, Buyer sold Target and assigned the lease to the new owners, who eventually closed the business and defaulted under the lease. The landlord sued the new owners and Sellers, as guarantor. Sellers settled with the landlord. Sellers made demand on Buyer for reimbursement of $5,000 expended in defending and settling the new owner’s suit against Sellers. When Buyer did not offer reimbursement, Sellers brought this suit against Buyer in a Texas state court, alleging that Buyer breached the purchase agreement by failing to obtain a termination of the guaranty and by failing to indemnify Sellers.

Buyer pushed back with various arguments but lost at the trial court level. Buyer appealed to an intermediate appellate court. This court agreed with the trial court, but only after spending pages in its opinion dealing with Buyer’s legal arguments involving the statute of limitations, impossibility, estoppel, and waiver.

This case is referred to Gano v. Diaz, No. 03-17-00119-CV, Court of Appeals of Texas, Third District, Austin, (Filed: June 28, 2018).

Comment. With 20/20 hindsight, Sellers could have avoided all the time and expense of litigation by insisting that Sellers get released by landlord at the closing. It may not have been possible, but the tradeoff of doing the deal without immediate release of the lease guaranty was the risk of litigation like this.

 

 

By John McCauley: I help people start, grow, buy and sell their businesses.

Email: jmccauley@mk-law.com

Profile:            http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

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Posted in Assignment, leases, personal guaranty of lease

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