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What Is So Good About a Good Guy Guaranty?

divorce1In a commercial lease, a “good guy” guaranty is often signed by one or more of the tenant’s principals. A “good guy” guaranty functions to ensure the payment of rent (and sometimes the performance of other obligations) under the lease through the date that the tenant surrenders possession of the premises. It is less onerous than a personal guaranty which would obligate the guarantor to all of the lease obligations during the entire term of the lease.

The typical scenario in which a “good guy” guaranty becomes operative is as follows: the tenant can no longer pay rent and would like to cancel the lease prior to the lease expiration date; the tenant gives the landlord notice that it would like to surrender the space; the tenant surrenders possession of the space on the agreed upon date; and the “good guy” guarantor is liable up until the date of surrender. Even though the guarantor will be released from liability on the surrender date, the named tenant will remain liable under the lease.

Although the “good guy” guarantee is more favorable to the tenant than an unlimited guaranty, there are some pitfalls. Among the concerns are: (i) the amount of notice that tenant must give the landlord prior to vacating the premises; and (ii) the scope of the guarantor’s liability.

Notice

The “good guy” guaranty provides that the tenant must give the landlord advance notice of the intent to surrender the premises before a guarantor will be released. The notice period reduces the likelihood that the space will be vacant by giving the landlord a sufficient amount of time to find a new tenant.

How much notice is required? Notice periods may range anywhere from one to three months or longer. The guarantor will be liable for certain agreed to lease obligations up until the space is surrendered with the proper notice.

Scope of Liability

The scope of liability under the “good guy” guaranty can vary widely. Some may state that the guarantors are only liable for monetary obligations, such as rent, additional rent, holdover charges and the security deposit.

Many current “good guy” guaranties, however, include the guaranty of performance of all other lease obligations, including the duty to repair the premises, remove any improvements and to indemnify the landlord in connection with personal injury actions which are not covered by insurance.

We have noticed that it is common for term sheets of commercial leases to simply provide for a “good guy” guaranty without describing what it is that the tenant’s principal will be guaranteeing and for how long. While brokers often say “you will only be liable for the rent”, this is rarely the case. More often than not, the tenant’s principal agrees to a guaranty without knowing what obligations they will ultimately be responsible for.

Since the liability that a “good guy” guarantor is exposed to can vary widely, we urge proposed tenants to work with their attorney to clarify the obligations they are willing to assume before agreeing to a “good guy” guaranty in the term sheet. Otherwise, it may be difficult to change the terms of the guaranty while negotiating the lease and the tenant’s principal may wind up with more exposure than he or she bargained for.

By: Jerome J. Strelov and Ryan V. Stearns

Category: Commercial Corner, Commercial Leases, Good Guy Guarantees, News Comment »


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