WRITTEN BY JONATHAN LUTTWAK
Aug. 26, 2020
When negotiating a commercial real estate lease for office space, you may be asked by a landlord to agree to a ‘good guy’ guarantee. This ‘good guy’ guarantee is a special type of personal guarantee that provides protection to landlords in the event a tenant goes into default or is otherwise unable to continue.
While a ‘good guy’ guarantee is a type of personal guarantee, it only goes into effect under certain conditions and has a specific purpose, that of ensuring a tenant that is in default vacates the premises. While it may seem onerous, subject to how it is written, financial strength of the tenant’s business, and proposed security deposit amount, it is often reasonable for a landlord to ask for a ‘good guy’ guarantee and appropriate for a tenant to sign it.
This article will help tenants and landlords better understand the nuances of the ‘good guy’ guarantee, what it does, what risks it imposes on the guarantor, and under what circumstances it should be included in a commercial lease negotiation.
What Is A 'Good Guy' Guarantee?
A “good guy guarantee” is a type of conditional personal guarantee. We describe it as conditional because it only goes into effect if a tenant that is in default fails to provide the required notice and vacate. The name is derived with the idea that a ‘good’ market participant should provide notice and vacate if they are going to ultimately default on the lease. Failing this, the guarantor, traditionally an officer or principal of the business signing the lease, assumes personal liability for the entire lease obligation.
Therefore the ‘good guy’ guarantee incentivizes tenants to vacate the premises while providing appropriate notice to the landlord to avoid taking on personal recourse. Most good guy guarantees ask that the tenant give the landlord some notice, stay current through that notice period, and then vacate the premises in the condition specified in the lease document.
The key here is that a ‘good guy’ guarantee is conditional. As long as the Tenant vacates the Premises and is current through the notice period, then the landlord has no personal recourse against the principals or officers.
The good guy guarantee is a short legal document and the language is negotiated by legal counsel.
How Is A Good Guy Guarantee Different Than A Personal Guarantee?
While a ‘good guy’ guarantee is a type of personal guarantee, meaning that a principal or officer of the firm that signs it is effectively providing a personal guarantee and therefore personal liability for the entire lease obligation, it is entirely conditional. As long as sufficient notice is provided, the rent is current through that notice period, and the business vacates and leaves the space in an appropriate condition, the guarantee is effectively terminated.
In a traditional personal guarantee, if the business is unable to fulfill the entire lease obligation, then the guarantor becomes personally liable for the entire lease obligation. Especially if a lease is terminated early, the liability may be significant and can result in the principal’s personal assets being at risk. Given the personal nature of this risk, most tenant brokers warn against tenants signing a personal guarantee.
How Does A Good Guy Guarantee Benefit Landlords?
Designed mainly to reduce holdover and squatting risk for landlords, the good guy guarantee ensures that landlords are protected in the event a tenant cannot pay the rent for the remainder of the lease. Good guy guarantees are typically requested during lease negotiations following review of proposed Tenant Financials. In some cases, offering a “good guy” guarantee can be a means of reducing the total amount of security deposit.
Without the presence of the good guy guarantee, a landlord may have to resort to legal proceedings to evict a tenant who isn’t up to date with their rent. Especially in New York, evictions are costly for landlords and means they incur more downtime and legal fees. The time spent evicting a problematic tenant could be spent collecting rent from a new tenant. Adding the prospect of personal liability forces market participants to provide notice and vacate.
What Is The Impact Of A Good Guy Guarantee On A Tenant?
While no one appreciates the notion of taking on any personal recourse, a ‘good guy’ is not an unusual ask in New York and is far more favorable to a traditional personal guarantee. In the event that the lease obligation becomes untenable or the business winds down, as long as you give the landlord notice, and leave the space in good condition, you only have to pay the rent up until you vacate the premises and the risk is limited to the security deposit.
One important thing of note is that this does not mean a commercial entity can simply provide notice and vacate with no recourse. The business entity will still be liable for the lease obligation and if the business is not winding down, the landlord will have a legitimate claim against the enterprise that signed the lease. The landlord therefore maintains the ability, like other creditors, to enforce their rights for the entire lease obligation but can only look to the entity.
Key Issues To Consider With Good Guy Guarantees
Deciding whether to sign a good guy guarantee or not is ultimately reliant on the terms of the lease negotiations. Not all good guy or personal guarantees are the same. Your broker will be working to get the best terms for you as the tenant, while your landlord’s broker will do the same. The organizational credit history and size are the key considerations used to decide what is appropriate.
Notice Period
One main consideration that will be negotiated when signing a good guy guarantee is the notice period. While a three month notice period is common, landlords often try and negotiate for a longer notice period, and tenants try and negotiate for a shorter period.
For example, a landlord may ask a tenant to give at least six months notice in the event that they must default on the lease. Should you agree to those conditions, it is important to keep in mind that you will be responsible for six months worth of rent, even if you only give four months notice.
As a tenant, it is wise to give your landlord notice as soon as you have an idea that your business is not doing well. Not only is it helpful to your landlord, but it ensures that you will not be personally liable under any means.
What Happens If You Have A Good Guy Guarantee And Sublease Your Space?
In the event that a tenant’s business closes and they may have to default on the lease, they may choose to sublease the space to another tenant. This will allow them to collect rent payment from the subtenant to pay the lease, without breaching the lease contract.
If you do decide to take this route, be aware that you will still be personally liable for the lease if the subtenant can no longer pay for the rent and will not vacate the premises. The last thing you want is to risk your personal assets because your subtenant is squatting in the space.
Deciding Who Signs The Personal Guarantee
One of the last things to consider when signing a good guy guarantee, or a personal guarantee of any kind, is who will be the principal of the lease. If your business is a venture shared with other people, it may not be the best decision to assume the position as principal.
If some time down the road you decide to leave the business, and the business ends up defaulting on the lease and won’t vacate the premises, you will still be personally liable for the lease.
Alternatives To Signing A Good Guy Guarantee
Although it is common to sign a good guy guarantee, there are still other options that will work to protect both you and the landlord. One viable option is increasing your security deposit instead of signing a good guy guarantee. Although this will require a larger upfront cost, it will ensure that neither you or your business will be personally reliable for the lease should you need to default.
Conclusion
While it is still a type of personal guarantee, a ‘good guy’ guarantee negotiated properly is reasonable for tenant’s to sign in certain instances. While no tenant wants to have any form of personal liability in a commercial lease, a ‘good guy’ guarantee is a market appropriate compromise to protect the landlord in an event of default, while minimizing personal liability to the tenant.
If you have any questions regarding a good guy guarantee, as either a tenant or landlord, feel free to contact us at DHC. Our brokers are experienced in negotiating key provisions in commercial leases in New York City, and are committed to protecting our clients in real estate transactions.
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