Harras Bloom & Archer LLP Blog

Friday, July 29, 2016

The Good Guy Guaranty and Personal Guaranties Under a Commercial Lease

By: Lynn Cosma Wenkert

Is it time to shop for new space for your business?  Your business has grown and has developed good credit on its own, yet landlords are still insisting that you give a personal guaranty on the lease. The purpose of forming a corporation in the first place was to avoid personal liability, so why give a personal guaranty on the lease?

A term you may have heard bantered about by your broker is a “good guy” clause.

A commercial lease typically provides that the Tenant is responsible to pay rent through the end of the term. If the Tenant vacates prior to expiration of the term, the Landlord can continue to sue the Tenant to collect the rent due throughout the remainder of the term.  Unlike a residential lease, the Landlord has no duty to attempt to re-rent the space to reduce Tenant’s damages.  Further, anyone who has personally guaranteed the Lease will continue to be responsible for the payment of the Tenants obligations.

A good guy clause is a way to limit your personal liability under a lease guaranty.  While there are many variations on the theme, the general idea is that as long as the tenant pays the landlord everything owed through the date of termination and surrender, in other words acts like a “good guy”, that the landlord will not enforce the personal guaranty under the lease.  In order to use this type of provision, the tenant must give the landlord the amount of advanced notice required by the good guy provision, ie; 1 or 2 months. The premises must be surrendered in the condition required under the lease, usually vacant and broom clean. The tenant is also required to have paid the landlord all sums due through the date of termination, ie; all rent, taxes, CAM, utilities, late charges and any other sums due. Usually any security deposited under the lease is forfeited, and the tenant cannot use the security deposited as rent during the notice period. 

Common variations on the good guy provision include an extended notice period, ie, 6 months or more, or the payment of a few months additional rent.  Although little more than thinly veiled extortion, these additional concessions to the landlord are still far better than continuing personal liability for the balance of the term of the lease.

 If your business is forced to close, a personal guaranty on the lease could lead you down the road to bankruptcy court.  A good guy clause, will at least allow let you to walk away from the lease obligations, to move on to better things. A good guy clause will not however, relieve your corporation, the tenant, of its obligations under the lease.  If the tenant is closing its doors, this will have no real impact, the tenant has no assets out of which the landlord or any other creditor can collect.  If however, the tenant has assets, then a good guy clause will not provide adequate protection.  For example, you may be seeking to terminate the lease because your company requires larger space. Unfortunately, even though the good guy clause will protect you from personal liability, your corporation will still be responsible for the payment of rent for the remainder of the term.  In this type of situation, you should try to negotiate a surrender with your landlord.

There are numerous other ways to limit personal liability under a lease worth considering.  Often a landlord will insist upon a personal guaranty when they have made a substantial investment in building out a space for a particular tenant. In such situations, the landlord does not want the tenant moving out under any circumstances until such time as the landlord has recovered its costs for the buildout.  Thus, a personal guaranty for a set period of time; ex, 1 yr, will give the landlord the assurance that they will be able to recover the monies invested in the buildout. 

The Landlord may also agree to accept a deposit of additional security instead of a guaranty.  The additional security will cover the Landlord’s costs until the space is re-rented.  Similarly, a bond may be posted to cover the landlord’s losses in the event of tenant’s termination.

There are several situations in which a tenant may be seeking to assign its lease.  One is where they have the mis-fortune of continuing liability under the lease and cannot negotiate an agreeable buy out with the landlord.  Another, more common reason, is where the lease is being assigned in connection with the sale of the business.  In either of these situations, the tenant does not wish to remain responsible under the lease and the landlord must consent to any assignment.  There are few situations worse than being responsible for another parties obligations when you do not have possession of the space or the collateral, something like signing a car loan for an x-boyfriend. 

Very few Tenants are thinking about how to get out of a lease, when they are focused on making a deal with the landlord.  It is reassuring to know that you have considered your exit strategy when things aren’t going as you planned.  This makes it essential that your lease clearly states that your personal guaranty will terminate upon an assignment of the lease to which landlord consents.  You surely don’t want to be in a situation where you are responsible for the failure of the buyer of your business to pay rent. 

A final bit of advice for New York guarantors, never have both spouses sign on a guaranty.  The reason for this is that most spouses own their homes as tenants by the entirety.  In New York, as a general rule, a creditor, cannot force the sale of the marital residence to collect upon the debt of only one spouse.  There are, of course exceptions, but a business debt would most likely not be one of them.

Be a “good guy”, treat your landlord as you would like to be treated, it could have a big payoff if you need to terminate.

 




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