Despite its increasing presence as an exhibit to restaurant leases in New York and New Jersey, the Good Guy Guaranty is a commonly misunderstood form of lease guarantee.
This article will discuss what a Good Guaranty is, some common misconceptions, and the potential benefits and pitfalls to landlords, tenants, and guarantors.
In nearly all restaurant leases, the tenant under the lease is a limited liability company or other form of business entity designed to limit the personal liability of the company’s owner. Consequently, many landlords require the owner of the restaurant to personally guarantee the tenant’s lease obligations (such as rent payments), particularly when the tenant is a new business without a long financial track record. One increasingly common form of guarantee is referred to as a “good guy” guaranty.
In essence, a Good Guy Guaranty is a limited personal guarantee whereby the guarantor – who typically owns or controls the tenant – is fully responsible for the payment of the rent, and potentially other lease obligations of the tenant, only while the tenant remains in possession of the leased premises, provided that certain conditions are satisfied. Traditionally, the guarantor’s liability under the Good Guy Guaranty terminates if: (i) the tenant provides the landlord with the required advance written notice (typically 90 to 180 days) of the date that it will surrender the premises; (ii) the tenant surrenders the premises in the condition required under the lease; and (iii) the tenant is current on its lease obligations up to the date of surrender. If the tenant satisfies these (and possibly other) conditions, the guarantor’s personal liablitity for the tenant’s lease obligations terminates as of the surrender date.
Critically, contrary to a common misconception, a Good Guy Guaranty is not a defacto early termination option under the lease. Although the guarantor may be released from personal liability under the lease upon satisfying the required conditions and surrendering the premises, the tenant itself remains fully liable to the landlord for all of its obligations under the lease.
A properly negotiated and drafted Good Guy Guaranty should serve the interests of all parties involved.
For landlords, the Good Guy Guaranty provides them with a tool – a personal obligation on the guarantor - to encourage a tenant to be a “good guy” and surrender possession of the leased premises after the required notice period, rather than stay in possession and fight eviction through the judicial system, which can be a long and costly process. Indeed, when a tenant files for bankruptcy, it is often protected from a judicial eviction process, even if the tenant is not paying rent. Thus, the primary benefit to landlords afforded by a Good Guy Guaranty is avoiding a lenghty and costly legal fight, and promptly getting the premises back in brome-clean condition, so that the landlord can mitigate its losses by reletting the premises as quickly as possible.
Guarantors also clearly benefit from a Good Guy Guaranty. Unlike a full payment and performance guarantee, a Good Guy Guaranty allows the guarantor – who has often already suffered significant losses as a result of the closure of the restaurant – to terminate his or her personal liability for the tenant’s lease obligations for the balance of the lease term if the leased premises is surrendered as required. Such a limitation on the guarantor’s personal liability is particulaly important when the restaurant has fully ceased operations and the term of the lease extends well beyond such point.
Although the two sides to a Good Guy Guaranty – additional security for and return of the leased propety to the landlord, and limited personal liability for the guarantor – are straightforward, the devil is in the details. The following are points to consider when negotiating and drafting a Good Guy Guaranty.
Landlords – who often bear substantial upfront costs in a lease transaction, such as brokerage commissions, initial build-out costs, and unamortized rent concessions, to name a few – should protect their upfront costs by including a minimum lock-in period, or a long notice requirement, before the tenant can surrender the premises and release the guarantor from personal liability. Additionally, landlords should include a provision whereby the guarantor is liable for the full monthly rent up to the surrender of the premises even if the landlord accepts partial payment from a struggling tenant. Landlords should also fully clarify the tenant’s end of term and early surrender obligations with respect to the condition of the premises. “Broom clean” doesn’t address whether the tenant is required to remove installations or restore the leased property to the condition it was in when the landlord delivered possession.
Tenants and guarantors, on the other hand, should make sure to carefully read the Good Guy Guaranty in conjunction with the lease. If the Good Guy Guaranty includes personal liability for “additional rent,” the guarantor could be on the hook for liquidated damages or other lease obligations that can be monetized as “additional rent” upon a tenant default. Similarly, guarantors should carefully read any rent acceleration clauses in the lease, under which payment of all fixed-rent may become due and payable upon a tenant default. If a tenant default triggers such rent acceleration prior to the date of surrender, the landlord could argue that the guarantor is liable for the full rent for the remainder of the term, notwithstanding the tenant’s early surrender of the premises. The guarantor should also include language that its liability for rent will be reduced by the balance of the unapplied security deposit.
Good Guy Guarantees are an integral tool in commercial lease transactions. It is vital that landlords, tenants, and guarantors fully understand their benefits and limitations, and avoid costly negotiating and drafting mistakes.
If you have any questions about the topics covered in this article, or any other questions related to commercial leasing, please do not hesitate to contact Kellen Murphy at (201) 650-3126 or firstname.lastname@example.org.
Kellen F. Murphy and John P. McDonough are partners at Murphy Partners LLP, a boutique law firm specializing in commercial real estate matters, with a particular focus on representing restaurants and other hospitality businesses in lease negotiations and other real estate transactions.