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A good guy guarantee is a literal person (usually the owner or a principal in a business) steps up and commits to a limited personal guarantee of the lease (someone who is such a “good guy”).
If a commercial tenant can no longer pay the rent, the company will notify the landlord that they are exercising their good guy guarantee, and upon the termination date (usually 3-6 months), the tenant gives the space back and the landlord is free to lease to another tenant.
The good guy’s role is to personally ensure that rent is paid up until that time.
For example, if a company is out of business as of December 31, and triggers their good guy clause that has a three month notice, then the landlord will get the space back for April 1 and the good guy will be personally responsible for rent for January, February and March.
With the dot com of the late 1990’s, commercial real estate markets were hot.
Tech companies were well funded and needed lots of office space. By the time the bubble burst in the spring of 2000, there was a flooding of sublet space that came back to the market, and many of the dot com companies went bankrupt.
Particularly in NYC (and New Jersey) the eviction process is onerous and lengthy – it can take over a year to evict a commercial tenant.
This is why the good guy clause is almost exclusively a New York clause, as you can see with Google Search trends (though we have also seen this clause in leases in California, Florida and Texas):
Hence the popularity of the good guy clause – the landlord can get the keys back, and rent out the premises to another tenant without formally having to evict the tenant that went out of business.
As with most clauses in commercial leases, it is all up for negotiation.
Just as you do not have to sign a regular commercial lease guarantee, if you have the right negotiating leverage, you do not have to sign the good guy clause.
This clause is a matter of risk for both sides. A couple of ways to eliminate this clause is to increase the security deposit, or to scale back on other concessions such as free rent or a leasehold improvement allowance.
A personal guarantee is typically an indemnification for the entire length of the lease term.
The good guy provision has a specific date and requires the tenant vacate the premises.
While a landlord would love to have a personal guarantee for the entire length of the term, it is also important to get their space back so they can rent it out to the next tenant as soon as possible.
Take for example, a hot Manhattan office market. A tenant is paying below market rental rates and goes out of business. Rather than going through a lengthy eviction process, the landlord would prefer to receive a check for 3 months’ worth of rent and lease the premises to the next tenant, at current market rental rates.
As many commercial leases have a full-blown personal guarantee, this is a limited version of that, and the only thing the landlord asks for in return is to give the space back, which is typically what your intentions are anyway. The good guy clause favored in particular by start ups for this reason.
There is no standard template to exercise your good guy right. Most landlords would accept notice provided by email. It can be as simple as:
Further to clause X in our lease with respect to the Good Guy Guarantee, please accept this as notice that we wish to invoke this clause. We will be up to date in all rent and arrears by that date and will provide possession of the premises for your re-letting.
The steps required to fulfill the good guy clause are as follows:
1 – Provide written notice
2 – Ensure all rents are paid up and to that date
3 – Leave the premises in a broom swept condition on the surrender date
You should consider your exit strategy from your business and your lease.
What happens if you sublet the premises or you sell your business? Is the good guy clause something that you will still be liable for?
Typically leases will have blanket statements that transfers all obligations to an assignee.
For example, what if you sell your restaurant and there are 5 years left on the lease, and there are 2 rights to renew for 5 years? That is 15 years in total. What if that owner goes out of business 7 years from now and cannot afford to support the good guy clause?
Upon the assignment or subletting of your lease, you should get in writing from your landlord that the good guy clause shall no longer apply to you.
Unless otherwise stated, you should consider the deposit to be its own entity and that it will not be co-mingled with funds for the good guy indemnification.
Here is an actual good guy clause that we copied and pasted from our most recent lease we reviewed in NYC:
In order to induce <LANDLORD>, as Landlord, to enter into a Lease with _______________________, as Tenant, dated as of June ___, 2019, for portion of the ground floor retail space located at <ADDRESS>, New York, New York (the “Lease”), and in consideration of Landlord’s entering into the Lease, _______________________ (the “Guarantor”) hereby jointly and severally guarantees, unconditionally and absolutely, to Landlord, its successors and assigns, the full and faithful, performance and observance of all the covenants, agreements, terms, provisions and conditions of the Lease provided to be kept, performed and observed by Tenant (expressly including, without being limited to, the payment as and when due of the Minimum Annual Base Rent, Additional Rent, and all other charges payable by Tenant under the Lease) and the payment of any and all other costs, expenses and/or monetary damages for which Tenant shall be liable by reason of any act or omission contrary to any of said covenants, agreements, terms, provisions or conditions.
Notwithstanding the foregoing, provided that Tenant gives Landlord Ninety (90) days advance written notice of its intention to cease operations at the Demised Premises (“Tenant’s Notice”), the Guarantor’s liability pursuant to this Guaranty shall be limited to the performance of Tenant’s monetary obligations, including the payment of such Minimum Annual Base Rent, Additional Rent, all other charges and damages (other than damages accruing by virtue of the acceleration provisions of the Lease) as accrued up to the Limitation Date (collectively, “Monetary Obligations”). Such Monetary Obligations shall not include any repayment of the construction allowance set forth in Exhibit G to the Tenant for Tenant’s Work. The term “Limitation Date” shall mean the date upon which Tenant has surrendered the Demised Premises and paid all Monetary Obligations due and owing through the later of: (i) the expiration date for the Tenant’s Notice; or (ii) the date for the Tenant’s surrender of the Lease and the Demised Premises or the date the Landlord obtains legal possession of the Demised Premises through legal action, whichever is applicable. In order for the Tenant Notice to be valid, a Default, pursuant to Article 23 as to the Tenant’s obligations under the Lease, shall not then be in existence at the time the Tenant Notice Letter is sent and/or upon the expiration of the Limitation Date.
If this Lease is terminated due to the Tenant’s default or the Tenant sends a Termination Notice where the effective date for such termination is prior to the Expiration Date of the Term of the Lease (without regard to any such earlier termination of the Lease) the Monetary Obligations hereunder shall also include the pro rata portion of rent abatement to the extent applied against Base Rent and the pro rata portion of the brokerage commission in the amount of $103,540. Such pro-rata portion shall cover the first five (5) Lease Years of the Term of the Lease from the effective date for such termination and shall include the entire month in which any such termination occurs (without taking into account the earlier termination date). Such pro rata portion shall be calculated after deduction of any free rent period. For the purposes herein, the effective date for such termination shall in no event be less than the date which is ninety (90) days after the Tenant sent a Termination Notice.
To the extent the Tenant sends the Landlord the Tenant’s Notice prior to its opening for business to the public for the Permitted Use in the Demised Premises and/or during the Free Rent Period nothing withstanding such ninety (90) day period for such termination of the Lease to take effect from Landlord’s receipt of Tenant’s Notice, the Landlord shall be entitled to shorten the effective date for such termination of the Lease to the date established by the Landlord upon written notice to the Tenant. Notwithstanding any such written exercise by the Landlord to shorten the effective date for such Lease termination, the Guarantor’s Monetary Obligations under this Guaranty shall remain the same and unchanged.
The Guarantor expressly agrees that Landlord may, in its sole and absolute discretion, without notice to or further consent of the Guarantor and without in any way releasing, affecting, or impairing the obligations and liabilities of the Guarantor hereunder:
This Guaranty, and all of the terms hereof, shall be binding on Guarantor and the successors, assigns, and legal representatives of the Guarantor.
The Guarantor does not require and hereby waives all notices of Tenant’s nonpayment, nonperformance, or nonobservance of the covenants, terms, and conditions of the Lease. The Guarantor hereby expressly waives all notices and demands otherwise required by law which the Guarantor may lawfully waive.
Insofar as the payment by Tenant of any sums of money to Landlord is involved, this Guaranty is a guaranty of payment and not of collection, and shall remain in full force and effect until payment in full to Landlord of all sums payable under this Guaranty. The Guarantor waives any right to require that Landlord bring any legal action against Tenant before, simultaneously with, or after enforcing its rights and remedies hereunder against the Guarantor.
Landlord shall not be required to make any demand on Tenant, apply any security deposit being held by Landlord on behalf of Tenant or any other credit in favor of Tenant, or otherwise pursue or exhaust its remedies against Tenant before, simultaneously with, or after enforcing its rights and remedies hereunder against the Guarantor. The Landlord may retain the security deposit under the Lease and such security deposit shall not be applied to any of the Guarantor’s obligations and liabilities under this Guaranty. If the security deposit is a letter of credit, the Landlord may draw down the proceeds of such letter of credit and retain the entire proceeds of such letter of credit. In any event, the proceeds of such letter of credit shall not be applied against Guarantor’s Monetary Obligations.
Neither Guarantor’s obligation to make payment in accordance with the terms of this Guaranty nor any remedy for the enforcement thereof shall be impaired, modified, released, limited, or affected in any way by any impairment, modification, release, or limitation of the liability of Tenant or its estate in bankruptcy, resulting from:
Until all of Tenant’s obligations under the Lease, as guaranteed hereunder, are fully performed, the Guarantor:
It is hereby agreed that trial by jury shall be waived in any action brought on or with respect to this Guaranty.
The Guarantor agree to pay all costs and expenses incurred by Landlord in enforcing this Guaranty, including, without limitation, all reasonable legal fees and disbursements.
This Guaranty is, and shall be deemed to be, a contract entered into under and pursuant to the laws of the State of New York and shall be in all respects governed, construed, applied and enforced in accordance with the laws of said state; and no defense given or allowed by the laws of any other state or country shall be interposed in any action or proceeding hereon unless such defense is also given or allowed by the laws of the State of New York. The Guarantor agrees to submit to personal jurisdiction in the State of New York in any action or proceeding arising out of this Guaranty and, in furtherance of such agreement, the Guarantor hereby agrees and consents that without limiting other methods of obtaining jurisdiction, personal jurisdiction over the Guarantor in any such action or proceeding may be obtained within or without the jurisdiction of any court located in New York County and that any process or notice of motion or other application to any such court in connection with such action or proceeding may be served upon the Guarantor by registered mail return receipt requested or by personal service at the last known address of the undersigned whether such address be within or without the jurisdiction of any such court.
The Guarantor further agrees that this Guaranty shall continue to be effective or shall be reinstated if any payment of sums due hereunder are rescinded or must otherwise be restored by the Landlord, or if any other right which the Landlord may have at law or in equity against the Guarantor by virtue hereof become subject to any bankruptcy limitation. In the event any payment by the Guarantor to the Landlord is held to constitute a preference under the bankruptcy laws, or if for any other reason the Landlord is required to refund any such payment or pay the amount thereof to any other party, such payment by any Guarantor to the Landlord shall not constitute a release of the Guarantor from any liability hereunder, but the Guarantor agrees to pay such amount to the Landlord upon demand and this Guaranty shall continue to be effective or shall be reinstated, as the case may be, to the extent of any such payment or payments.
The Guarantor assume full responsibility for keeping fully informed of the financial condition of the Tenant and all other circumstances affecting the Tenant’s ability to perform its obligations to the Landlord, and agree that the Landlord will have no duty to report to the Guarantor any information which the Landlord receives about the Tenant’s financial condition or any circumstances bearing on its ability to perform.
This Guaranty may be changed only by written agreement signed by all parties to the Lease and this Guaranty.
This Guaranty imposes joint and several liability if there is more than one Guarantor of the Lease.