What is the ‘Good Guy Guarantee’ in New York City Commercial Real Estate?

What is the ‘Good Guy Guarantee’ in New York City Commercial Real Estate?

Breaking a commercial lease in New York City can be a real hassle for landlords and tenants alike. Lengthy legal battles and legal costs are something that both parties want to avoid. Good Guy Guarantees, or Good Guy Clauses, are found in most commercial leases in NYC, and they are meant to simplify this potential scenario and put landlords and tenants at ease.

How does the Good Guy Clause work in NYC?

In essence, the Good Guy Guarantee is a legal promise that if, for whatever reason, the tenant becomes unable to continue paying rent for the remaining lease term, they will give the landlord an advanced notification (typically three months notice, but it can go up to six months), pay all rental fees until the said departure date, and vacate the place, leaving it in broom-swept condition.

The Good Guy Guarantee is usually signed by one of the owners of the entity that is signing the lease. That person will serve as guarantor for the entire term of the Good Guy Clause. Sometimes, several owners of the entity sign this clause, so there may be several Good Guy Guarantors. 

A Good Guy Clause (or GGG) is meant to eliminate some of the risks involved with signing a new commercial lease. If the tenant breaks the lease before the lease term expires, or leaves the space without bringing rent payments up-to-date, the landlord will have no other choice than to take that tenant to court. Two following two scenarios will illustrate how a Good Guy Guarantee works:

Scenario 1: Breaking a lease with a Good Guy Clause in place

Let’s say a commercial tenant signs a five-year lease for an office space in NYC. The tenant breaks their lease and vacates the space after three years. The tenant (aka the entity on the lease) does not owe the landlord any rent on the date they vacate the space, and they return the space to the landlord in broom-clean condition. The financial liability of the Good Guy Guarantor(s) ends on the date that the tenant vacates the space. 

Scenario 2: Breaking a lease with no Good Guy Clause in place

Now, let’s imagine that a commercial tenant signs a five-year lease, but the entity defaults on their lease after three years. The tenant remains in the space without paying rent, forcing the landlord to commence an eviction proceeding. It then takes the court six months to evict the tenant. The Good Guy Guarantor(s) is personally liable for rent payments during the period of time that the tenant occupied the space without paying rent. 

How can a tenant benefit from a Good Guy Clause in NYC?

The tenant signing the commercial lease indirectly benefits from a Good Guy Guarantee. The clause is meant to make the landlord more comfortable by reducing the risk of litigation, and as a result, a landlord is more likely to agree to a reduced security deposit. To avoid the risk of personal liability for defaulted rent payments, the GGG must comply with the following:

  • The tenant needs to notify the landlord of their departure in advance (usually three to six months ahead, but this can be negotiated).
  • The tenant needs to be up-to-date with rental payments, utility bills, and any other additional costs included in the lease agreement.
  • The tenant needs to leave the space clean and in broom swept condition.

Liability to the Good Guy Guarantor occurs if the tenant doesn’t respect the obligations stated above. If all the requirements are fulfilled by the time of departure, the guarantor is no not liable for the remaining lease term agreed upon in the original lease agreement. 

It is important to note that in the event that the Good Guy Clause is exercised, the tenant’s security deposit will be forfeited. 

What if the tenant sublets the space or undergoes a buyout?

If a commercial tenant is subletting a space to another business, the Good Guy Clause remains in effect. This means that, if the sublessee leaves the space before the lease term expires, the original tenant is still the one responsible for the lease. The same principle applies if a company is sold: the original Good Guy Guarantor remains on the hook for the lease. In the event of a company buyout, the landlord might agree to substitute a new Good Guy Guarantor that is a principal of the company acquiring the tenant, and to release the original guarantor from their obligations. 

What is the difference between a Good Guy Guarantee and a Personal Guarantee?

A Personal Guarantee is a guarantee of term, meaning that it remains in effect for the full duration of the lease, while the GGG is a guarantee of payment, and only applies while the tenant remains in the space. 

Consequently, if the tenant vacates the space before the end of the lease, a Personal Guarantee will require them to pay rent for the remaining months negotiated in the original lease. With a Good Guy Guarantee, the liability of the guarantor ends once the space is vacated. 

Are there instances when a Good Guy Guarantee is not Applicable?

Most commercial space leases in NYC include a Good Guy Clause, but in some cases, they are not necessary, or not even possible. Here are some potential situations:

  • The Good Guy guarantor is not a U.S. citizen – the clause has to be signed by a principal of the tenant company, and they must have U.S. citizenship. For legal reasons, landlords will not agree to a Good Guy Guarantor with no assets in the U.S. 
  • The tenant is a publicly-traded company – There is usually no individual owner for a publicly-traded company to serve as the Good Guy Guarantor.