The good-guy guaranty is a commonly used form of security in the field of commercial leasing. Despite appearing straightforward, the fundamentals of a good-guy guaranty are often misunderstood by landlords, tenants and brokers. Failing to understand the implications of a good-guy guaranty may result in unintended consequences for the landlord, the tenant and the guarantor.
Guaranties are an important component of commercial lease negotiations. Before signing a lease, a landlord will typically review and assess a tenant’s financial information. If the tenant doesn’t have sufficient credit, the landlord may require a third party to guaranty the lease. In the context of leasing, a guaranty is a third party’s promise to pay and perform the tenant’s obligations arising under a lease.
If the landlord requires a full guaranty, the guarantor will be asked to guaranty all of the tenant’s lease obligations. Alternatively, a landlord may ask for a limited guaranty, of which there are several variations. Some limited guaranties cap the guarantor’s exposure to a certain dollar amount, while others may terminate after a period of time.
A good-guy guaranty is considered another type of limited guaranty. It is limited because, if a tenant complies with certain conditions set forth in the guaranty, the landlord will release the guarantor from liability under the guaranty. The conditions for the guarantor’s release traditionally include that (a) the tenant gives advanced notice (usually several months) of its intent to surrender the leased premises to the landlord; (b) the tenant is not in default; and (c) on the agreed upon surrender date, the tenant returns the premises to the landlord in the condition required on the last day of the lease term. Additionally, the landlord may require the tenant to pay for the landlord’s unamortized costs for brokerage commissions and tenant improvement allowances.
Tenants often misunderstand that if the “good-guy” conditions are met, only the guaranty terminates and the guarantor is released from liability. The tenant is not. The landlord can still sue the tenant to, among other things, collect unpaid rent. Tenants need to understand that complying with the good-guy conditions does not terminate the lease. The tenant entity is still on the hook.
Furthermore, a good-guy guaranty is a limited guaranty only if the good-guy conditions are satisfied. Otherwise, it is a full and absolute guaranty. If the tenant and the guarantor fail to comply with the good-guy terms, the guarantor is fully liable to the landlord.
Landlords need to understand that they may be left with an insolvent tenant and no recourse against the guarantor. The advantage to the landlord of the good-guy guaranty is that it motivates the tenant to return the building to the landlord and to cure any existing defaults. If the tenant doesn’t comply with the good-guy terms, the landlord will have full recourse against the guarantor. Ultimately, the type of guaranty agreed upon is part of the bargain struck between the landlord and the tenant. The good-guy guaranty can be a fair middle ground for both parties, which is why it is essential for landlords and tenants to fully understand the benefits and pitfalls of their bargain.
[View source.]
