In 2003, L + C Unlimited Corporation (L + C) was assigned a lease that permitted the Golden Isle Restaurant to operate in a strip mall in Murray, Utah. The lease provided for late fees and interest on past due amounts. Xiao–Yan Cao, L + C’s president, personally guaranteed the “performance of all covenants, conditions and obligations and duties required of Tenant under said Lease.” In 2006, the lease was assigned to Hong G. Lin. As part of that assignment, the lease term was extended until September 30, 2013, and both Cao and Lin signed personal guaranties.
In 2010, Lin fell behind making rent payments. Unbeknownst to Cao, Lin and PC Riverview, the property’s landlord, agreed to a repayment schedule that allowed Lin to operate the restaurant while paying PC Riverview what it owed in missed payments, interest, and late fees. Lin made each payment when due, and PC Riverview forgave seven-eighths of the late charges that had accrued.
In 2013, Lin vacated the premises without paying the last month’s rent and a small balance he owed for the previous month. PC Riverview sued both Lin and Cao to recover the \($5,003.50\) that Lin owed. The case against Cao proceeded to trial.
The district court ruled for Cao. The district court determined that the 2010 repayment schedule was a material modification that discharged Cao from liability on the guaranty. However, the Utah Court of Appeals reversed and concluded that the guaranty did not grant Cao the right to notice of any modification of the underlying lease or prohibit extensions or modifications without her consent. Cao appealed to the Utah Supreme Court.
JUSTICE JOHN A. PEARCE Cao correctly notes that a material modification to a contract will free the guarantor from her guaranty obligations. See, e.g., DiMeo v. Nupetco Assocs., LLC, 309 P.3d 251 (Utah Ct. App. 2013). But “minor alterations” to a debtor-creditor agreement “are not of the nature or degree that would trigger a discharge of [the sureties’] pledge of security under suretyship law.” Id.
Cao claims that PC Riverview materially modified the lease when it (1) allowed Lin to stay in the property even after falling behind in the rent and (2) did not notify Cao that Lin was delinquent in paying rent. Cao’s guaranty provides that Cao “shall be the Guarantor and hereby guarantees performance of all covenants, conditions and obligations and duties required of Tenant under said Lease.” The court of appeals reviewed the terms of the guaranty and noted that it did not offer Cao what she wanted—notice of Lin’s default and the right to consent to modifications. Indeed, by asking the district court to find that she had a right to notice of default and an opportunity to intervene, it was Cao who sought to modify the parties’ agreements.
Second, Cao argues that the court of appeals misapprehended the significance of the 2010 repayment agreement when it reasoned that the agreement did not materially modify the terms of her agreement with Lin. The court of appeals explained that “because the [2010 repayment agreement] only extended the time for [Lin] to pay past due rent, it was not a material modification of the original agreement.” PC Riverview LLC v. Cao, 381 P.3d 1185 (Utah Ct. App. 2016).
Cao contends that an extension of time does materially modify a lease and that Lin and PC Riverview’s 2010 repayment agreement materially modified her obligations as guarantor, thereby discharging her of her personal guaranty. However, before the modification, Cao was potentially responsible for Lin’s rent, interest, and late fees. And after the 2010 repayment agreement, Cao could have been responsible for Lin’s rent, interest, and late fees.
Minor alterations to the underlying agreement do not materially alter the risk the guarantor agreed to assume. The 2010 repayment agreement did not expose Cao to different or new terms than she was already exposed to under the lease. There was no material modification. Without more, the mere extension of time at issue here is not of the nature or degree that would trigger a discharge of Cao’s duties under her agreement. PC Riverview is thus entitled to enforce the guaranty Cao signed.
A guarantor is relieved of her obligations under a guaranty if the creditor and debtor materially modify the guaranteed agreement. Here, the 2010 repayment agreement did not materially modify the Lease.
We affirm the court of appeals’ decision.
CRITICAL THINKING:
How did the judge arrive at his decision? Do you agree the 2010 repayment agreement was not a material modification of Cao’s obligations especially as she was not notified of its existence? Why or why not?
ETHICAL DECISION MAKING:
How would you analyze Cao’s behavior from an ethical standpoint? Was Cao utilizing a technicality to avoid repayment of a legitimate debt of the business?