A good guy guaranty is a personal guaranty frequently used in a New York City commercial lease. It is either a clause in the lease or a separate document. A good guy clause is typically signed by the tenant’s principal, who personally promises to fulfill all the obligations under the lease. In exchange, the landlord agrees to allow the corporate tenant to terminate the lease early provided certain conditions are met, such as all rent being paid up through the date of surrender. The good guy clause also requires that the tenant gives the landlord sufficient notice of termination (usually 90 days), the tenant completely vacates the premises and leaves it in”broom-clean” condition. As of the date of the surrender of the premises, the landlord releases the guarantor from all obligations under the lease.
The good guy clause protects both the tenant and the landlord. The good guy guarantee gives a tenant’s principal the ability to walk away from their obligations under the lease if the business fails. The good guy guaranty protects landlords because tenants who may default on rent are personally liable for rent during long eviction proceedings. The tenant also has an incentive to surrender the premises earlier if the business is not profitable. The tenant’s principal will attempt to negotiate not signing any personal guaranty, but if the landlord demands one, opting for a good guy clause caps potential liability. It also usually results in landlords demanding a smaller security deposit. Landlords almost always demand personal guarantees when leasing to start-up companies with no assets.
The tenant must not be in default (including non-payment of rent) when it gives notice to the landlord. Therefore the tenant should negotiate the shortest notice period. Sometimes, a landlord will attempt to negotiate that a good guy guaranty cannot be exercised during the first few years of the lease term. Another key negotiating point is whether the tenant will have a duty to remove all alterations made and fixtures installed (“restore the premises”) upon the surrender of the premises.
Usually, when exercising the good guy guaranty, the tenant will lose its security deposit. The argument made by landlords regarding the loss of the security deposit is that the tenant is technically defaulting on the lease, only the principals of the tenant’s entity are being released from their personal obligations.
Always Demand a Good Guy Guaranty
Just because a clause is labeled a “good guy guaranty” does not mean that the tenant’s principals can rely on it protecting them. Many such guarantees contain so many conditions that they may as well be full, personal guarantees. Tenants should retain an experienced attorney to negotiate these documents. In the event the business fails, this clause is the single most important provision in the lease.
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