What is a Good Guy Guarantee?
Landlords are often faced with the difficult balance between the need to offer favorable leasing terms to prospective tenants and the need to protect themselves and their real property investment against tenants experiencing economic hardship who fall short on their financial responsibility. For this reason, “Good Guy” guarantees have become increasingly common in the commercial leasing realm and the subject of considerable focus and review during lease negotiations. To comprehend good guy guarantees, first, it is important to understand the dynamics of a commercial lease.
Who is Responsible?
More often than not, a prospective tenant signing the lease agreement, does so NOT in his/her individual capacity as a natural person, but rather in the capacity of the company entity, i.e. corporation, LLC, PC, etc. Therefore, it is the company entity that is agreeing to financial and legal responsibilities of the lease agreement. As such, in the case of default, the landlord’s legal recourse is limited to only pursuing the company entity, which may be difficult or futile when the company has no assets or simply no longer exists.
What is a Personal Guarantee?
To protect landlords against a breach by a tenant of its financial and legal obligations under the lease, it is a well-established practice in commercial leasing transactions that a landlord require the tenant to provide a security deposit (typically two months) and a principal of tenant (i.e. president of the corporation or any other creditworthy affiliate/individual) to guarantee tenant’s performance under the lease. This is known as a Personal Guarantee. By executing the personal guarantee, the guarantor guarantees the payment of all rent and other amounts due by tenant under the lease and the performance of all of tenant’s obligations and undertakings thereunder for the full term of the lease. This provides the landlord the ability to seek legal recourse against the company (tenant) AND the guarantor (personally) in the case the tenant defaults under the lease agreement.
What is a Good Guy Guarantee?
The “good guy” guarantee is a LIMITED form of personal guarantee. The basic “good guy” guarantee calls for the guarantor to guarantee the rent, performance, and other financial obligations, if any, under the lease through the date tenant surrenders the leased premises to landlord, even if that occurs prior to the lease expiration date. Thus, the guarantor will not be responsible for paying the rent for the full term of the lease, rather the guarantor will only be responsible for rent through the date the tenant surrenders the space. The “good guy” guarantee contains a specifically negotiated set of limitations or conditions that, if satisfied, releases the guarantor from personal liability thereunder.
What is the Rationale for a “Good Guy” Guarantee?
The rationale for the “good guy” guarantee is to help satisfy the landlord’s overriding concern that if the lease is terminated prior to the full term of the lease as a result of a tenant default, the premises will be surrendered to landlord in the same condition in which they would have been had the lease expired in accordance with its terms (e.g., vacant, broom clean and with all amounts due and owing by tenant paid up to the date of expiration, etc.). Thus, in an effort to streamline the process, the “good guy” guarantee was devised by landlords to allow tenants to vacate the space and surrender possession of the premises to landlord to avoid protracted and costly landlord-tenant litigation and to make the space readily available for the next prospective tenant.
Evolution of Good Guy Guarantee
Over the years, the basic “good guy” guarantee has morphed into a sophisticated and complicated document with added conditions, limitations, notice requirements, additional security, stringent examination of the financial net worth of the guarantor, and/or termination fees, etc. There are a wide range of guarantee structures. Guarantees of any kind in a commercial leasing transaction should always be carefully reviewed by legal counsel before they are signed.
To learn more about “good guy” guarantees and/or related commercial leasing issues, please call Real Estate Attorney, Sergey Kalantarov, Esq. of Kalantarov Law, PLLC at (718) 425-4162