What is a Good Guy Guaranty?
Originally Published : May 23, 2013
Usually, the tenant in a commercial lease will be a company (LLC or corporation) as opposed to an individual. In these cases, the landlord will generally require a personal guaranty from a principal of the company. Instead of a full guaranty of the entire lease, landlords will often accept a limited guaranty, also known as a Good Guy Guaranty.
A Good Guy Guaranty is a personal guaranty of payment and performance under a lease, but is limited to the tenant’s obligations during the time that the tenant is in possession of the premises. This means that if the tenant wishes to get out of the lease, the tenant can surrender the premises to the landlord, and the guarantor will only be responsible for any amounts owed up to that point in time. This significantly limits a guarantor’s liability, especially if the tenant has signed a long-term lease.
Often times in a Good Guy Guaranty, the landlord will require a certain amount of notice from the tenant before they are allowed to surrender the premises. This is because the landlord wants some time to search for a new tenant, so that he is not harmed by having a vacant space. Some landlords will also request that the tenant forfeit the security deposit if they surrender the lease pursuant to the Good Guy Guaranty. These are both points that can be negotiated with the landlord.
Here is an example of a typical situation: Company X opens a restaurant and signs a 10 year lease. The owner signs a Good Guy Guaranty with a 90-day notice provision. In year 3, the restaurant is failing and the owner wants to close. The owner can give the landlord 90-days notice, clean out the space, and pay rent up until the 90-day notice expires. At that point, he can hand the keys back to the landlord, and the owner will have no more personal liability to the landlord under the lease.
It is important to note that even if a tenant surrenders the premises and uses the Good Guy Guaranty, the tenant company can still be liable for amounts due under the lease. Again, this is a point worth negotiating with the landlord, so it is important to understand the full terms of the lease.
It is always important to consult with a small business attorney when considering entering into a commercial lease. Please contact us with any questions regarding these or other commercial lease provisions.