A good guy guaranty negotiation pertains to a limited personal guaranty frequently used in New York City commercial leases. 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 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), and 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.
Pros and Cons
The good guy guaranty negotiation is for the benefit of both the tenant and the landlord. This guaranty allows a tenant’s principal to leave their obligations under the lease if the business fails. The good guy guaranty protects landlords because if a tenant default, it cannot be exercised. The guarantor would remain personally liable for rent during lengthy eviction proceedings. The tenant is also incentivized to surrender the premises earlier if the business is not profitable. The tenant’s principal will attempt to avoid personal guaranty, but a good guy clause caps potential liability if the landlord demands one. It also usually results in landlords requiring a smaller security deposit. Landlords almost always demand personal guarantees when leasing to start-up companies with no assets.
The tenant must not default (including non-payment of rent) when it gives notice to the landlord. Therefore the tenant should seek the shortest notice period in a good guy guaranty negotiation. Sometimes, a landlord will negotiate that a tenant cannot exercise a good guy guaranty during the term’s first few years. Another critical negotiating point is whether the tenant will have a duty to remove all alterations made (“restore the premises”) upon the premise’s surrender.
Usually, when exercising the good guy guaranty, the tenant will lose their security deposit. The landlord’s argument 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 obligations.
Always Demand a Good Guy Guaranty
Just because a clause is labeled a “good guy guaranty” does not necessarily mean it is one. Many such guarantees contain so many conditions that they may as well be complete, personal guarantees. Tenants should retain an experienced attorney for a good guy guaranty negotiation. If the business fails, this clause is the most critical provision in the lease.
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