Contract law - When is an individual liable as a personal guarantor for a company's lease contract obligations?

Analysis:  The recent Tennessee Court of Appeals decision of Creekside Partners v. Albert Nathan Scott, No. M2012-00623-COA-R3-CV, 2013 WL 139573 (Tenn. Ct. App. January 10, 2013) discussed the liability of an individual as a personal guarantor for a corporate tenants lease obligations.  This case comes on the heels of the recent Tennessee Supreme Court decision of 84 Lumber Co. v. Smith, 356 S.W.3d 380 (Tenn. 2011) which is a very important Tennessee case on this issue.  The Creekside case provides further explanation on how Tennessee courts will analyze this type of a situation following the 84 Lumber Co. decision.

In this case the individual in question, Albert Nathan Scott, signed the written contract as follows:

IN WITNESS WHEREOF, the undersigned Tenant, Landlord, and Guarantors have executed this Lease the day and year first above written.

Additionally, Article 32 of the lease provided as follows:

Article 32. Guarantors.

In consideration of the letting of the Premises, the sum of TEN DOLLARS ($10.00) and other good and valuable consideration, receipt of which is hereby acknowledged, the undersigned Albert Nathan Scott, does hereby guarantee and become primarily liable as a co-Tenant(s) do(es) hereby promise and agree to pay unto the Landlord, its successors and assigns, such sum or sums of money as will be sufficient to make up such deficiency and fully satisfy the conditions of this Lease; however, said co-Tenant(s) called upon to perform under this Article shall, upon satisfaction of such default, at this option, be entitled to assume the position of the defaulting Tenant hereunder and shall thereafter enjoy all of the rights and privileges of the original Tenant hereunder.

The plaintiff therefore asserted that these two portions of the executed lease (his signature and Article 32) caused Mr. Scott to be an individual guarantor of the lease.  As a result, when the corporate tenant, NTS Enterprises, Inc. defaulted on the lease, Mr. Scott became personally liable for the lease obligations according to the plaintiff.  The Tennessee Supreme Court stated in the 84 Lumbar decision that “in most cases, a representative who signs a contract is not personally bound to the contract.  A representative who signs a contract may be personally bound, however, when the clear intent of the contract is to bind the representative."  Creekside Partners at 3 (citing 84 Lumber Co. at 382, 383).  As a result, the court analyzed the specific terms in the contract.

The court in the Creekside Partners case first analyzed the actual signature section of the contract.  The court noted that the only signature provided by Mr. Scott is addressed under the corporate entity name, "NTS Enterprises, Inc." and right after the name it says "by." Creekside Partners at 3, 4.  Immediately below his name it says "Its: President".  The court found that this structure and language in the signature part of the lease shows Mr. Scott was not signing as a personal guarantor but only in his representative capacity. Creekside Partners at 3, 4.

The court then looked at the "Article 32. Guarantors" section of the lease (see above full quotation).  The court pointed out the language in Article 32 was the same size and text as the rest of the contract. Creekside Partners at 5.  In the 84 Lumber Co. case, similar language was actually typed in all capital letters and was set off from the rest of the text.  Creekside Partners at 5.  Additionally, in the Creekside Partners case the court found ambiguity in the "Article 32. Guarantors" section.  This section purports to make Mr. Scott a personal guarantor however throughout the rest of the lease there are several sections which identify only NTS as a tenant, not Mr. Scott.  The court found this was an ambiguity in the lease.  Additionally, Mr. Scott’s name is only listed in relation to the words “guarantee” or “co-tenant” in one line of text out of 1,267 lines of text in the lease.

As a result, based on all of the language in the lease agreement, the court found this case was distinguishable from the 84 Lumber Co. case and that the lease "does not show a clear intent that Mr. Scott was contracting as an individual guarantor of NTS's obligations". Creekside Partners at 5. 

This is an important personal guarantee contract interpretation case.  The actual language and the form of the language in the personal guarantee agreement is very important.  First, if you are trying to make an individual a personal guarantor of a contract, they should sign the document expressly as a personal guarantor in addition to simply signing on behalf of the corporate entity.  Additionally, if there is guarantor language within the lease it would be helpful to have it in all caps, bold, and set off in a different font from the rest of the text in the agreement.  Further, it is very important to make sure the document is internally consistent and there are no ambiguities found in the contract.  This case shows a good defense can be presented against a poorly or even unclearly drafted personal guarantee agreement.

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