By Gerald H. Morganstern Esq.
Hofheimer Gartlir & Gross, LLP
The good guy guaranty, a form of limited guaranty and staple of many commercial office leases, is undergoing a transformation today as the market improves and landlords seek the opportunity to gain the edge.
In its early use, this relatively benign limited guaranty typically forced a defaulting tenant to be a “good guy” and promptly turn over the premises it occupied to the landlord. It did this by compelling the tenant’s guarantor to pay rent from the time a tenant went into default until the date the tenant surrendered the leased space to the landlord.
In exchange, the landlord benefitted by avoiding months spent to evict a tenant who continued to operate with no ability or intention to pay any rent during that period of time. The surrender enabled the landlord to immediately re-rent the space and minimize its damages, while avoiding potentially expensive litigation.
Times have changed. Today’s “good guy guaranty” is more comprehensive and potentially exposes guarantors and tenants to significant liability over the duration of a lease. Tenants and their attorneys need to be much more wary of the language and intent of these agreements as they negotiate the lease. Here are some major pitfalls to watch out for and possible solutions to make them as least onerous as possible.
1. Subleases and Assignments
If the tenant subleases the premises, a guarantor is now responsible for both the subtenant’s and tenant’s occupancy. Exposure can be reduced in this case by requiring a subtenant to pay an additional security deposit to the tenant who in turn would deliver a further security deposit to the landlord. Another solution is for the tenant to accept a “good guy guaranty” from a principal of the subtenant.
If the tenant assigns the lease, a guarantor has no control over the assignee in occupancy. The tenant must make provision for this possibility in the lease or guaranty or resolve these issues at the time of the assignment. For example, as part of the landlord’s approval, the tenant could negotiate a termination of the guaranty with a principal of the assignee substituted as guarantor.
2. Accrued Rent Such as Real Estate Taxes and Operating Expenses
“Good guy guaranties” have been expanded to guarantee all rent due or accrued from the execution of the lease until the tenant vacates to cover unpaid amounts prior to the declaration of default. Another embellishment is to add back to the tenant’s rent concession or abatement at the beginning of the lease term brokerage commissions with a provision that provides that and construction costs, making all of them due and payable prior to the date the tenant surrenders the space. The sum would then be encompassed by the “good guy guarantee.” Amortizing these extras over the term of the lease is a minimum step in keeping the guaranteed amount at a reasonable level.
Leases usually have non-waiver provisions so that the landlord does not waive any rent due, even if the landlord does not collect it or bill for it. If, for example, the landlord did not bill for an operating expense escalation or for real estate taxes, either because the amount was small or the landlord overlooked it, the good guy guaranty today might well include these sums if the landlord later sought to collect them. Moreover, some guaranties state the surrender of the lease ends the guaranty only if the tenant is current in its rent so there are instances when a landlord says “gotcha” if some additional rent is unpaid even though the guarantor is liable for such rent. If not paid because not known, the guarantor may be obligated to pay another month’s rent.
- 3. Compliance with Law, Repairs, Maintenance and Other Obligations
Some forms of guaranty provide that the individual is guarantying rent, but others include all obligations of the tenant from the date of the lease execution. Now the guarantor is responsible for matters other than rent, such as provisions requiring compliance with law, repairs and maintenance. A careful reading of the lease is necessary to determine the obligations of the tenant. Sometimes a lease provides that a defaulting tenant is liable for the unamortized portion of brokerage commissions, legal expenses or construction costs paid for by the landlord as part of its leasing of the space. In some instances, you do not even have to look in the lease. One form of good guy guaranty expressly states that the guarantor guarantees these items in addition to the rent.
4. Giving Notice Before Surrender of Premises
Expanding the good guy guaranty even further, some landlords have provided that the surrender of the premises must be by a written surrender agreement accompanied by the keys and actual possession. Some have gone even further and provided that the tenant must give several months notice before delivery of this surrender agreement and possession. The argument is that the tenant generally plans in advance to cease business. If the tenant notifies the landlord three or four months in advance, the landlord has ample time to prepare for a transition. Most individuals will find this an unacceptable burden, but many may agree to a one or two month notice provision.
5. Tenant Bankruptcy
The guarantor and/or tenant should consider what happens in the event of the tenant’s bankruptcy. Some “good guy guaranties” provide that the guarantor is liable in the event of the tenant’s bankruptcy from the time of the bankruptcy until the surrender. Under the Bankruptcy Code, the rejection of the lease and surrender of the space may take up to ninety days, which would be covered by this guaranty. It may also change the guarantor’s thinking about whether to file bankruptcy voluntarily on behalf of the tenant, since the guarantor will be personally responsible for the tenant’s indebtedness. The good guy guarantor also knows that if the tenant pays the landlord past due rent, that money may be considered a preferential payment to a creditor requiring the money to be paid to the bankruptcy trustee. The guaranty makes the good guy guarantor again liable for those preferential payments.
6. Relationship Between Tenant and Guarantor
The surrender of the premises may release a guarantor, but will not release the tenant of its obligations for the balance of the lease term. The landlord may seek damages from the tenant and use any security deposit toward unpaid future rent. The guarantor is usually required to subordinate seeking reimbursement from the tenant until the landlord has been paid in full.
Guarantors, who are not the sole owners of the tenant, should obtain an agreement from the co-owners whereby each agrees to reimburse your guaranty obligations to the extent of their respective percentage interests in the tenant.
The limited guaranty, often called a “good guy” guarantee, may be requested by a landlord along with a security deposit that is determined following the letter of intent and review of the tenant’s financial statement. If a landlord does not offer a simple” good guy guaranty” then reaching a fair guaranty will be a matter of negotiation. The tenant should discuss the proposed “good guy guaranty” with an experienced broker and lawyer as soon as it appears as part of the lease terms and possibly be prepared to negotiate long and hard.