6 Things to Know About ‘Good Guy’ Guaranties

Dena Cohen

The office leasing market changed its trajectory dramatically since the onset of the COVID-19 pandemic. Vacancy rates quickly accelerated, placing downward pressure on rents. That pressure remains as the future of remote work trends and the role of the office remain uncertain. As a result, landlords have become more flexible on concessions and terms as they seek to fill empty space.

This is good news for smaller businesses and start-ups who, previously priced out of markets like Manhattan, may now have the chance to upgrade or expand at manageable rents.

What is not changing, however, is the landlord’s strong interest in securing rental obligations after making steep concessions for tenants light on credit and operating history. The only thing worse for a landlord than vacant space is space that is occupied by a non-performing tenant. To avoid this potential headache, landlords have traditionally looked to (among other security requirements) the so-called “good guy” guaranty.

A good guy is a personal guaranty of a tenant’s lease obligations through the date that the tenant returns the space to the landlord even if that date is before the end of the lease term.

The need for the good guy guaranty is especially strong in cities like New York, where a “bad guy” tenant can take advantage of crowded court calendars that delay eviction proceedings during which time it occupies the space rent-free. Even if the landlord ultimately obtains possession of the space and a judgment against the tenant for unpaid rent, by then the tenant may have few or no assets, and the landlord has lost valuable time and rent in reletting the space to another tenant.

As a result, many landlords insist that tenants lacking sufficient assets and credit (and even sometimes those possessing those resources), provide someone to stand behind the tenant’s lease obligations at least until the space is returned to the landlord. If the guarantor is a “good guy,” that person will—subject to certain conditions—be released from liability for obligations arising after the space is surrendered to the landlord provided the other conditions for release are satisfied.

Usually, the guarantor is a principal of the tenant but may be someone else who benefits from the lease. So how good of a guy does a “good guy” need to be? It varies. Here are some things you need to know about this lease provision.

1. Obligations covered by the good-guy guaranty

The extent of liability under a good guy guaranty, like any other lease guaranty, can vary greatly. Naturally the guarantor is interested in limiting its liability to the greatest extent possible, and in the best of cases, to base rent (perhaps even with a cap) and not accelerated rent.

At a minimum, however, the landlord will likely insist the guaranty cover rent, additional rent for taxes, operating expenses and utilities, and payment of mechanic’s liens through the “vacate date” (as well as mechanic’s liens that are filed after the “vacate date” for work performed before that date.)

Once in a while, a landlord will try to include the unamortized cost of the tenant improvement allowance, free rent and brokerage commission in the good guy obligations. However, these amounts will have already been factored into base rent so it partially negates the benefit of a good guy. These arguments should be unsuccessful.

Guarantors will generally seek to avoid covering indemnification obligations and other liability that cannot be quantified.

2. Advance Notice

The tenant will typically be required to give prior notice to the landlord of its intent to vacate (I have seen anywhere from 30-180 days). Therefore, in addition to the guaranteed obligations arising prior to the surrender of the space, the guarantor will likely be liable for the guaranteed obligations arising during this notice period, and these obligations generally would not be reduced by any security deposits held by the landlord, as discussed in more detail below.

3. Terms of Surrender

In order to take advantage of the release from liability under the guaranty, the guaranty will typically require that the tenant deliver the keys to the landlord to evidence its surrender and sometimes a “Surrender” document signed by the tenant. The guaranty may also require that the premises be delivered in the condition that would be required if the premises were being surrendered at the normal expiration of the lease. This may mean that space must be “broom-clean” with all repairs that the tenant was required to make during the term having been made.

4. No Event of Default

Generally, the guarantor will not be released if rent is not current on the date the tenant vacates the space. In other words, if rent is in arrears, the guarantor does not limit its liability by vacating the space. In that case the guarantor’s liability will continue to accrue until the lease obligations are current through the date of payment. Tenants have argued that this limitation is inconsistent with the purpose of the good guy, which is to hold a guarantor responsible for the lease obligations that accrue only until the space is vacated. Thereafter, the guarantor’s liability for pre-surrender obligations continues but the amount of the obligations would not continue to accrue. Most landlords reject this argument. Like everything in negotiations, it’s all about bargaining power.

5. No Release of Tenant

A common misconception is that, if the conditions for release of the guarantor are satisfied, the tenant is also released. This is generally not the case. The purpose of the good guy guaranty is not to provide an early exit to the tenant. It’s to protect the landlord during the period of the tenant’s occupancy and only releases the guarantor if all the release conditions are met. Therefore, if the tenant stops paying rent, it will not receive a return of its security deposit and will remain liable for the all lease obligations even after the space is vacated.

6. Security Deposit

Even if there is a good guy guaranty, the landlord may nevertheless require that the tenant deposit security (such as cash deposit or a letter of credit) depending upon the tenant’s financial condition and the amount of the landlord’s investment in the lease (e.g. for tenant improvement allowances, free rent and brokerage commissions). However, the tenant may be able to deposit less security if there is a good guy guaranty. The landlord is typically not required to utilize the security deposit to reduce any rent payable by the tenant prior to the “vacate date” in order to reduce the guarantor’s payment obligations, but rather might apply it to rent obligations of the tenant accruing after tenant vacates the premises.

Good guy guarantees are mainstays in leasing transactions, particularly with tenants who are not very well established and capitalized. They provide security to the landlord that the rent will be paid until the space is returned. In times like these, the landlord may feel more confident in taking a chance on leasing space to a new business and (possibly) accepting a lower security deposit.

Dena Cohen is a partner at the law firm Herrick, Feinstein LLP.