A landlord may request a principal of a tenant or an affiliated entity to guarantee lease obligations if the prospective tenant has a less-than-ideal credit profile. In a tenant-friendly market, few landlords will be successful in this pursuit. Consequently, a savvy landlord may request a sufficient security deposit, plus a limited or "Good Guy" Guaranty from a principal or affiliate of the tenant.
Unfortunately, the landlord's perception of what obligations are covered by a Good Guy Guaranty can be very different than the prospective tenant's and guarantor's view.
Most landlords, tenants, and guarantors agree on the basic premise for a Good Guy Guaranty, namely that its purpose is to (1) incentivize the tenant to vacate the premises at the expiration or earlier termination (due to, for example, the tenant's default) of the lease, and (2) ensure that all accrued rent is paid up to the date of such vacating. The Good Guy Guaranty attempts to achieve these objectives by making the guarantor liable for rent that accrues under the lease up to the date that the tenant actually vacates the premises and leaves the premises in the condition required under the lease. In states that obligate a commercial landlord to mitigate damages arising from a defaulted lease, the tenant's, guarantor's, and landlord's interests are all served by having the defaulting tenant turn over the premises to the landlord so that the landlord may seek a new tenant as soon as possible.
What is guaranteed?
Landlords will typically insist that the guaranteed obligations include unpaid fixed rent and additional rent accrued to the date of vacating. While guarantors will try to limit the guaranteed obligations to fixed rent, most will lose this battle.
Exploding guaranteed obligations.
More aggressive landlords may also attempt to expand the guaranteed obligations in circumstances where the guarantor fails to pay all accrued rent on the "vacate date" (more on how that can be defined below), so that, in such circumstances, the guarantor is also liable for all sums due under the lease for the remainder of the lease term.
What is the vacate date?
While this question seems simple enough, it is anything but. Both the landlord and the guarantor start out with the same objective: to establish a date by which the tenant must (1) turn over the keys to the premises and (2) vacate and surrender the premises in the condition required by the terms of the lease. Both landlords and guarantors generally agree that the guarantor should be liable for all accrued rent that is unpaid by such date, i.e., the "vacate date." The guarantor's preference is for the vacate date to be defined as the later of (1) and (2) above, i.e., the later of the date it turns over the keys or the premises, so that the guarantor's obligation for any unpaid accrued rent ends as of that "vacate date." Some landlords, however, will try to include in the definition of the "vacate date" (i.e., the date that determines guarantor's liability), the date by which tenant pays to landlord all accrued rent. While guarantors will not object to being obligated for the amount of accrued rent due on the date it vacates the premises, most would object to the date of the payment of that amount determining the vacate date.
Notice requirement. Is the guarantor going to remember this?
Landlord, tenant, and guarantor agree that the landlord is entitled to advance notice of the date that the tenant intends to vacate the premises, if that date is prior to the expiration of the term, and that the tenant and guarantor should not be required to provide any notice of vacating in connection with the expiration of the term of the lease. This advance notice gives the landlord the opportunity to begin planning for the marketing and re-letting of the premises. The point of contention, however, is the legal significance of the tenant/guarantor's failure to provide timely, i.e., accurate, notice of the date of vacating. Aggressive landlords will insist that the tenant's failure to vacate on or before the date specified in the notice be a condition precedent to the occurrence of the vacate date.
Should the security deposit be applied to the guaranteed obligations?
Many landlords view the security deposit as additional collateral for the tenant's obligations under the lease. Accordingly, landlords routinely provide in the Guaranty that the security deposit not be applied to the obligations guaranteed under the Good Guy Guaranty. This may be a hard pill to swallow for the guarantor, since the guarantor's funds and the tenant's may be interchangeable. If the purpose of the security deposit is to cover the defaulted rent up until the date the tenant vacates, the guarantor will argue, why should the guarantor also be liable for that same rent? Would the landlord be double-dipping? To the extent the tenant has sufficient leverage in the negotiations, it may be able to require that the landlord apply the security deposit to the guaranteed obligations.
What about obligations of the tenant's assigns?
Almost every Good Guy Guaranty will provide that it remains effective despite the assignment of the lease by the tenant. As standard and seemingly innocuous as this language may appear, it raises a potential problem for the guarantor. If the rationale for the Good Guy Guaranty is that the guarantor has control over the tenant, and specifically its motivation to vacate the premises, does that rationale apply after assignment? Given the standard provision in the Good Guy Guaranty (and in almost every other type of guaranty) that the guarantor waives notice of default under the lease, will the guarantor have any way of discovering that a default exists under the lease if the original tenant has assigned its obligations thereunder and is no longer receiving default notices?
Conclusion
All parties should develop a clear understanding at the early stages of the lease negotiations of what the Good Guy Guaranty should and should not provide. The parties may discover that the simple reference to a "Good Guy Guaranty" in a letter of intent or term sheet means something significantly different to one of the parties than the other originally contemplated. One measure would be including the basic provisions of the Good Guy Guaranty in the letter of intent. Another would be an agreement to simply increase the amount of the security deposit provided under the lease. As with most negotiated points in a commercial real estate transaction, the resolution of these issues will depend on the relative bargaining power of the parties.
This article is presented for informational purposes only and is not intended to constitute legal advice.
