November 23, 2020

The Good Guy Guarantee – An explanation of a clause often used in NY office leases

An important step in any lease negotiations is the area of mitigating risk – for both parties. The landlord will outlay capital expenditure at the front end and will want to ensure the tenant performs for the duration of the lease and be covered, if for any reason, the tenant defaults. Equally the business owners are trying not to be over exposed to any personal risk.

In the case of the commercial lease there are several elements at play here, the corporate entity that the tenant uses on the lease, the security deposit, and any guarantees. The landlord will weigh up several factors in determining how these elements are used; the financial track record of the tenant, is it a startup? or is it a foreign entity with assets overseas? Etc. In some cases only a security deposit is required in others the landlord may demand a deposit and a guarantee.

Guarantees can be full or partial, and the Good Guy guarantee is an example of a partial guarantee, personal to one of the principals of the business and is frequently used in New York commercial leases.

It requires the principal to personally guarantee all the obligations under the lease while the corporate entity occupies the space after it ceases paying rent.

In New York the eviction process is lengthy and costly and so it’s saying:- If you’re a “good guy” and give us a heads up that the business is struggling (typically 3-months notice)  have paid up all your rent and vacate the premises ‘broom clean’, we will release you from your personal obligation.

It should not be interpreted by the tenant as a ‘break clause’, it will typically be restricted in the first years of the lease through a minimum lock-in period and will result in loss of the security deposit. While it releases the personal guarantor, the corporate entity is still liable.

Like all aspects of a lease it is negotiable and requires drafting by legal experts but if drawn correctly will benefit both sides. The Good Guy Guarantee gives a tenant’s principal the ability to walk away from their obligations under the lease if the business fails while protecting the landlord because tenants who may default on rent are personally liable for rent during long eviction proceedings.