Release of a Guarantor in a Lease Contract

Critical Points

• The case concerned a dispute arising out of a commercial lease of industrial space to a company active in the shipbuilding sector. Due to the inability of the original debtor company to pay the rent due, the lessor took action against itself and the natural person who had guaranteed its payment.
  
• The correct handling of the case resulted in the acceptance of the objection to release the guarantor from liability, due to the negligence of the lessor in not seeking the satisfaction of its claim from the first debtor company in time. 

Background 

A company operating in the wire manufacturing sector has leased a property to a boat building company for its business needs. The then President and CEO of the leasing company - which was one of the family businesses frequently encountered in Greece - and the son of the latter were contracted as guarantors of the lease. The guarantors undertook to cover the rents that would not be paid (or would be paid late) by the leasing company, up to the amount corresponding to twelve (12) leases. The lease relationship was basically operating smoothly, but a few months before its expiration, the lessee delayed payment of six (6) consecutive rent payments. This resulted in the landlord terminating the lease and bringing an action for restitution of the lease and payment of the outstanding rent. This action, in seeking payment of rent, was also brought against one of the guarantors. The Athens Court of First Instance gave judgment on that action in the absence of the defendant guarantor, that is to say, without the defendant guarantor appearing and putting forward his pleas in law and submitting his objections. By that provisionally enforceable judgment, in the relevant part of the judgment, the tenant and the guarantor were ordered to pay the rent due, with the total debt exceeding EUR 120 000. Two years after the judgment was issued and while the first debtor company had been dissolved due to serious financial difficulties and had been put into liquidation, the lessor sought enforcement of the judgment against the lessee and the guarantor. 

Strategy 

The key points for the successful outcome of the case were the following:

• Making the most of the opportunity for the party who was convicted at first instance to develop a full and unconstrained defence to the action before the appellate court. In undertaking the guarantor's defense in the second instance, we have devised a rich palette of procedural and substantive contentions against the action, thereby providing additional opportunities for the success of our defense. 
  
• The detailed highlighting of the manifestations of the lessor's negligent conduct in relation to the failure of the primary debtor to seek satisfaction in a timely manner, through the meticulous processing of the pleadings and evidence in the first instance, combined with the collection of more recent evidence and the strong jurisprudential and theoretical foundation of our claims.

Result 

The court of appeal upheld the defendant guarantor's plea for release from liability under the provision of Art. 862 CC, according to which: 'The guarantor shall be released if the creditor's fault made it impossible for the debtor to satisfy him'. It was initially established that the first debtor company was unable to satisfy the lessor's claim, since, according to the decisive passage of the judgment, 'the first debtor leasing company became financially weak and insolvent, which led to its dissolution...'. It then went on to show that the lessor could easily foresee the forthcoming financial weakness of the first debtor 'taking into account the previous conduct of the first debtor', which had also in the past been late in paying rent. Furthermore, the court considered crucial for the assessment of the lessor's culpability was the granting of a repayment period to the first debtor, and even without the knowledge of the guarantor, which resulted in an increase in the debt. Along the same lines, the court assessed the lender-lessor's procedural choices; the latter not only preferred to bring a lawsuit to the clearly faster procedure of issuing a payment order, but also "failed to proceed with immediate enforcement against the property of the first debtor to satisfy the claim in suit, as it had just .... (i.e. two years after the judgment was delivered), he only forcibly evicted her from the lease", failing to accelerate enforcement to satisfy her monetary claim (i.e. the claim for rent). The discovery and detailed presentation before the court of appeal of the assets (equipment and claims against third parties) held by the first debtor at the time the rents became due and payable proved to be of decisive importance. These assets could have been seized to the satisfaction of the lessor if the latter had sought to recover them in good time, i.e. before the first debtor became insolvent. 

Conclusion

The guarantor of a monetary debt, despite the fact that he often becomes at the mercy of the choices of the lender and the primary debtor regarding the overall course of the principal debt, has important means of defence in his quiver, the methodical use of which can ensure his final disengagement. In this case, a careful examination of the aspects of the case, which in turn has made it possible to establish a doctrinally sound basis for the means of defence chosen to defend the guarantor in question, has made it possible to release him from the responsibility he had initially assumed.