.in my commercial landlord-tenant practice, I frequently 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 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 surrender the premises. In that case, the guarantor is 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 and its security deposit. What many retail tenants try to do is sell the assets of their business and assign their leases. An asset sale is particularly popular with restaurant owners who may have liquor licenses. A below-market lease and liquor license are valuable commodities even if the restaurant fails. 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.
Restrictions on Temporary Closures
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, 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 enforce this clause initially, a tenant may not be able to sell the business quickly. In that event, a landlord would be motivated to change his position and serve a default notice.
High-end residential tenants may pressure their landlord to take issue with the vacant storefront in the building. What would a tenant do at that point when it may have released all its employees and ceased its relationships with vendors? Unlike some states, New York Courts enforce these “go-dark” provisions.
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, the tenant should know that before closing.