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602, 605, 56 L. R. A. 876; Bank v. Colcord, 15 N. H. 119, 41 Am. Dec. 685; Rogers v. School Trustees, 46 Ill. 428; Colebrooke on Collateral Securities (2d Ed.) § 239; Hays v. Ward, 4 Johns. Ch. (N. Y.) 123, 130.
By the terms of the lease, whose performance by the lessees was warranted by the bond in suit, the obligee in the latter granted to the tenants, the principals in the bond, the option to purchase the leased premises for $120,000 at any time during the lifetime of the lease. The surety in the bond had the right to acquire and to exercise this option by discharging the obligations of the lessees to the investment company, the lessor, and by invoking the principle of subrogation. The surrender of leased premises by the tenants during the term of the lease and the acceptance of the property by the landlord, without a notice that the latter takes it and will hold and use it during the remainder of the term for the use and benefit of the tenants exclusively, closes the term of the lease, and destroys all rights conditioned upon its subsequent continuance. Prout v. Roby, 15 Wall. 471, 476, 21 L. Ed. 58; Watson v. Merrill, 136 Fed. 359, 362, 69 C. C. A. 185, 188, 69 L. R. A. 719. The term specified in the lease was to expire on September 12, 1905, and the lessees and their surety, if they fulfilled their covenants, had the right to purchase the property for $120,000 on or before that date. The surrender of the hotel by the tenants and its acceptance by the landlord on December 27, 1904, closed the term of the lease on that day, and deprived the lessees and the surety of the right to make that purchase thereafter.
The first and the chief complaint of counsel for the surety is that the court below refused to hold that this surrender, which was made and accepted without notice to the surety, discharged it from all liability under its bond. They argue with commanding ability and great force and ingenuity that this surrender modified the terms of the lease and deprived the surety of the security of the right to purchase between December 27, 1904, and September 13, 1905, and that either effect was sufficient to release it. In support of this position they cite authorities which sustain the general rules of law which have already been stated, and Stern v. Sawyer (Vt.) 61 Atl. 36, where, without notice to the surety of the tenant, the landlord accepted a release of part of the leased premises which he sold for $2,250 and the lessee waived the performance of the lessor's covenant to repair, Holme v. Brunskill, Law Rep. 3 Q. B. D. 495, in which, without notice to the surety, the principal released a part of the demised premises to the lessor in consideration of a reduction of the rent ten pounds annually, Brandt on Suretyship & Guaranty, § 429, where a case is cited in which a yard, shed, and frame dwelling house were rented for $375 per month, and, without notice to the surety for the lessee, the latter surrendered the dwelling house to the landlord in consideration of a reduction of the rent for the remainder of the premises to $300 per month (Penn v. Collins, 5 Rob. [La.] 213), and Warren v. Lyons, 152 Mass. 310, 25 N. E. 721, 9 L. R. A. 353, in which there was a lease for a specified term for a rental of $108.30 per month, and a covenant by the lessee to pay the same rent as long as he held the premises after the expiration of the term, and before the term lapsed the lessor and the lessee, without notice to the surety of the latter, made a contract that after the expiration of the term the lessee should pay $100 per month while he occupied the property. In the case last cited the court held that the surety was not liable for the defaults of the lessee subsequent to the expiration of the term, because thereafter he was in possession under a new lease, and in the other cases the courts held that the sureties were discharged from liability. The case of Warren v. Lyons is not in point because there is no attempt to charge the defendants here with liability for any default under any new lease or under any contract different from that specified in their bond. All the breaches of covenant for which it is liable here occurred before the surrender of the premises. The other authorities cited fail to control this case because it falls without the rule of law which governs them. That rule is not that an enforcement, but that an alteration of the terms of a guarantied contract, without notice to the surety, discharges him. The case at bar is one of enforcement of the contract assured. Those cited are cases of material alteration of the terms of the guarantied agreements. In the three cases of partial release the lessees were not in default, and the lessors had no right to the releases. The lessees surrendered property which they had the undisputed right to hold during the term in violation of the terms of the original contracts. They modified the terms of the leases by agreements with their lessors, and thereby made new leases without notice to the sureties. The sureties were discharged because the lessors and the principals made new contracts, not in the performance of the terms of the original agreements, but in conflict with them. It was not so in the case at bar. The lease guarantied by the surety here provided that, if the lessees made default in the performance of any of their covenants or agreements, the lessor might lawfully declare the term of the lease ended and repossess and enter the premises as in its first and former estate. On December 27, 1904, when the surrender was made, the lessees were in default in the fulfillment of their covenant to pay taxes, of their covenant to pay premiums on insurance, of their covenant to recarpet, and of their covenant to pay for the heating plant and the plumbing, so that the lessor had the undoubted right under the provisions of the lease to declare its term ended and to take possession of the property for itself. The fact that it exercised this right with the consent and at the request of the lessees, instead of forcibly and against their protest, cannot change its character or its effect. The surrender of the premises by the lessees and the acceptance of the property by the lessor, after the defaults of the former, were acts in exact accordance with, and in the performance of the terms of the guarantied lease. They worked no alteration or modification of that contract, and for that reason they did not release the surety.
And here is the answer, also, to the contention that this surrender deprived the sureties of the option to purchase after December 27, 1904. The right to exercise this option was by the express provisions of the contract limited by the condition that the lessees should fulfill their covenants. It was granted during the lifetime of the lease only. The lifetime of the lease was conditioned, as we have seen, by the right of the lessor to end it whenever the lessees were in default in the performance of any of their covenants. When the surrender occurred they had made defaults, the surety had been notified thereof more than four months before the surrender, and neither the lessees nor the surety had removed them. The only right of the surety to exercise the option was by subrogation to the rights of the lessees, and it could rise no higher than theirs. The lease expressly provided that after the default of the lessees the lessor might terminate it, and might thereby end the right of the lessees and of the surety to purchase. By the acceptance of the surrender it effected this termination. But this act deprived neither the lessee nor the surety of the security of any right to purchase, because that right was expressly limited by the condition that it should end whenever the lease terminated by reason of the default of the lessees and the retaking of the premises by the plaintiff.
There is another reason why this surrender failed to discharge the surety. Its principals had failed to perform covenants of the lease whose fulfillment it had warranted. It had received notice of this fact four months before the surrender, and it had not discharged the broken obligations of the principals. The investment company had fulfilled all the terms of the contract which it had undertaken to perform. The principals in the bond and the surety had broken their covenants and the obligee had not, and the surety was aware of these facts. Now, although a surety is a favorite of the law and his liability may not be enlarged by construction nor extended without his consent by modifications of the guarantied contract, yet he, and not the obligee, covenants to pay and must respond for the damages caused by the defaults of his principals for which he promises indemnity. The contract of suretyship is not that the obligee will see that the principal pays his debt or fulfills his contract, but that the surety will see that the principal pays or performs. Nelson v. First National Bank, 16 C. C. A. 425, 435, 69 Fed. 798, 807; Williams v. Lyman, 31 C. C. A. 511, 514, 88 Fed. 237, 241. The obligee does not represent to the surety that the principal will keep his covenants, but the surety holds his principal out to the obligee, and represents and promises to him that the principal will perform his agreements. The surrender was the natural and lawful effect of the failure of the principals in this bond to keep the covenants which the surety warranted that they would fulfill and of the failure of the surety after notice to perform them for the principals. Even where one of two innocent parties must suffer from the wrongful act or default of a third, that one must bear the loss who intentionally or negligently enables the third party to cause it. The surety in the case in hand by the execution of its bond to the plaintiff gave a credit to the principals thereto and enabled them to hold the possession of this hotel for nearly two years and to incur the liabilities upon which this action is based, and to the amount of its bond it ought to bear the burden of the loss its action has occasioned, even if it had been innocent of default or wrong. A fortiori is it liable when it was itself in default for more than four months before the surrender occurred. “Where one of two innocent parties must lose, and one of them is in fault, the law throws the burden of the loss upon him.” Magee v. Manhattan Life Ins. Co., 92 U. S. 93, 98, 23 L. Ed. 699; Hearne v. Nichols, 1 Salk. 289. The result is that the surrender
of the premises and the termination of the lease on December 27, 1904, when both the principals and the surety were in default in the performance of their covenants, did not discharge the surety from the obligation of the bond.
The lessees made agreements with a contractor, a corporation, for the heating plant and the plumbing specified in the lease. The contractor completed the improvements by September 22, 1903, but the lessees did not pay it for them, and on January 3, 1905, it recovered a judgment against them for $8,795.93, and a decree against them and the lessor to the effect that it held a lien upon the leased premises for $5,175 and interest from the date of the decree. The lessor paid the latter amount to the contractor on January 20, 1905, in order to discharge its property from the lien, and the court below held that it was entitled to recover this amount from the surety on the bond. Counsel for the defendant contend that this was an erroneous ruling, and insist that the surety is not liable for this amount (1) because there was no express agreement in the lease that the lessees would pay for the heating plant and the plumbing which they agreed to furnish as part of their rent; (2) because the lease contained their express promise to give a bond with a surety conditioned to pay for the material and labor used in these improvements, and this stipulation excludes any implication of any other contract to pay for them (Hawkins v. U. S., 96 U. S. 689, 698, 24 L. Ed. 607); and (3) because the contract of the surety must be strictly construed, and may not be enlarged by construction or implication (U. S. v. National Surety Co., 92 Fed. 549, 550, 34 C. C. A. 526, 527).
The legal effect of the contract between the plaintiff, on the one hand, and the lessees and their surety, on the other, that the latter will pay for the labor done and the material furnished in making the improvements, is the same as the legal effect of a contract between them that the latter will indemnify the former against liens for such labor and material, or that they will pay for them, to the end that no liens shall be placed upon the property. The only damages which the plaintiff could recover under the first contract are those which it might sustain by the fastening of liens upon its property, and no one who performed work or furnished material could recover of the surety under either because he would be a stranger to each and would have no interest therein. As the distinction between contracts with owners of property to pay for work done and materials furnished to improve it and contracts to protect them against liens upon it is not material in the case in hand, it will not be further noticed in the discussion which is to follow.
A surety is never liable beyond the strict terms of his contract. His obligation may not be extended by construction or by implication. On the other hand, it may not be reduced or destroyed thereby. His agreement, like other contracts, must have a rational construction, an interpretation which, while it carefully restricts his liability to that which he agreed to undertake, does not fail to hold him to that liability which, by the plain terms of his agreement, he promised to assume. Written language has the same significance, and its meaning must be ascertained by the same rules of law when it is found in the contract
of a surety as when it appears in other agreements. National Surety Co. v. U. S., 63 C. C. A. 512, 514, 129 Fed. 70, 72; U. S. Fidelity & Guaranty Co. v. Board of Commissioners of Woodson County, 145 Fed. (C. C. A.) 144, 148; Stearns on Law of Suretyship, p. 18; Belloni v. Freeborn, 63 N. Y. 388; Wills v. Ross, 77 Ind. 1, 40 Am. Rep. 279.
This bond recites the fact that the lease has been made, and that the lessees "in lieu of a fixed rental for the said property are to do and perform certain things in the way of putting the said hotel in first class repair, adding steam heating and electric light plant thereto, and make certain payment of taxes and insurance, to which said lease reference is hereby made for the purpose of ascertaining in detail the exact obligations assumed by the said lessees thereunder"; and it is conditioned that the lessees shall “well and truly perform the obligations by them assumed under the said lease to the true intent and meaning thereof." The legal effect of these terms of the bond is to embody the entire lease therein to the same extent as if it had been literally written into it and to bind the surety not by implication, but, by the express terms of the bond, to indemnify the lessor against all loss it sustains by the failure of the lessees to perform any of the obligations which they assumed under the true intent and meaning of the lease. This conclusion is not inconsistent with the excerpt cited by counsel from Stearns on Law of Suretyship (section 143), that, “if the main contract is broader in its scope than the limits fixed in the bond, a reference to the contract will only incorporate so much of the same as is within the limits of the terms of the bond,” because the main contract is not broader in its scope than the limits fixed by this bond which by its plain terms guaranties the performance of every obligation assumed by the lessees by means of the lease. The question then becomes : Was it the true intent and meaning of the lease that the lessees should pay to their lessor their rent for the hotel by putting new plumbing and a new heating plant therein at their own expense or at the expense of the lessor? Was it that they should pay the rent they agreed to give to their lessor or that the latter should pay this rent to itself? The question seems to admit of but one answer. But counsel for the surety present ingenious arguments and persuasive authorities in support of their contention that the effect of the contract was that the lessor must pay for these improvements. Electric Appliance Co. v. U. S. Fidelity & G. Co. (Wis.) 85 N. W. 618, 53 L. R. A. 609; Dunlap v. Eden (Ind. App.) 44 N. E. 560; City v. Wolf (I11.) 45 N. E. 218; Boas v. Maloney (Cal.) 70 Pac. 1004; Gato v. Warrington (Fla.) 19 South. 883. The crucial question in the first three cases was whether or not a laborer or materialman could recover upon a bond given to the owner of the property conditioned for the faithful performance by the contractor of his agreement to furnish the necessary labor and material for the improvement, and it was answered in the negative, as it would be if such a plaintiff bought an action of this character upon the bond in suit upon the ground that the bond was not given for the benefit of the laborer or materialman, and that he had no interest in it. This question is not presented in the case at bar, and these authorities do not rule this case. In the last two cases the Supreme Courts of