Increasingly in my commercial landlord-tenant practice, I see defaults against retail tenants for ceasing business operations even though they remain current with the rent. With the declining retail market in New York City, many store owners are finding that they have to shut down their businesses. In doing so, they may exercise a “good guy” guaranty. The good guy guaranty allows them to give the landlord notice that they will be surrendering the premises and the guarantor is then released from the lease’s obligations at the end of the notice period. But in exercising a good guy guaranty, the tenant loses the “equity value” of the lease as well as its security deposit. What many retail tenants try to do is sell the assets of their business and assign their lease. An asset sale is particularly popular with restaurant owners who may have liquor licenses. Even if the restaurant is failing, a below-market lease and liquor license are valuable commodities. The new owner will likely change the cuisine or business model anyway. The restaurant tenant may try to save money by temporarily closing while it markets the business.
The problem is that most commercial leases have a “go dark” clause. This clause states that if a retail tenant closes its store for a certain number of consecutive days (commonly about two weeks), it will be in default of its lease. If the rent is below market, the landlord may enforce that clause and hold the tenant in default and seek the balance of the rent due under the entire term of the lease. Even if a landlord chooses not to initially enforce this clause, a tenant may not be able to sell the business quickly. In that event, a landlord would be motivated to change its position and serve a default notice. Other landlords may be pressured by high-end residential tenants in the building who take issue with the vacant storefront. What would a tenant do at that point when it may have released all its employees and ceased its relationships with vendors? Unlike some other states, in New York, these “go-dark” provisions are enforced by Courts.
Retail tenants exercising a good guy guaranty should retain an experienced commercial real estate lawyer to draft and serve the good guy notice. If there is a risk the tenant will close during the notice period; the tenant should seek the landlord’s consent in the surrender notice. Even if the landlord refuses to waive its rights under the “go dark” language, it is better for the tenant to know that before shutting down its business.