Scene: Midtown South – Commercial broker offices
The personalities: The Landlord, His Agent, Soon to be Tenant (Hedge Fund Company), and the Tenant Representative
Contract thus far: Most kinks squared away except for security deposit and matters related to guarantees.
(Audience listens in…)
Landlord: “Alright, this deal sounds good, so let’s get all the paperwork squared away. Just make sure I get the three months security up front, and all the other issues out of the way, including the ‘good guy guarantee’ from Robin”
Alright, so basically, it’s up to the lawyers to put in writing what exactly the landlord and tenants have in mind. Does the good guy clause pertain to New York City office space leasing? Let’s find out.
Time immemorial, security deposits in the office leasing world included cash and a general personal guarantee signed by any of the principals in the company. Of course changes were made depending on the assets of the tenant company.
Since about the year 2000, when signing unlimited personal guarantees became more unpopular with tenants, landlords increasingly demanded viewing the tenant’s monthly cash flow. This became particularly stringent in the retail sector. This provided some security for the landlord in the event the tenant abruptly ceased payments. However, tenants sometimes run into months of arrears in payments, or lots of extra costs for the landlord to fix a space up once the tenant has left. Sometimes, the tenant refuses to leave, which incurs headaches and legal fees for the landlord. All this without personal guarantees could spell trouble for landlords all across the commercial leasing landscape.
So, as is typical with New York City, good sense and ingenuity led to a compromise that would placate the Landlord’s worries as well as the unruly New York City tenant.
A hybrid began to emerge: A sort of win-win strategy started to take shape over the past decade in New York office leasing agreements. A personal guarantee would be granted to the landlord on the condition that the tenant could exit in the event business goes sour. This way, the tenant can vacate the premises with notice to the landlord, officially ending all personal obligations to the landlord.
Sounds like a great compromise, huh? This way the tenant signs more willingly and with more favorable terms, and the landlord is less likely to get the raw end of the deal.
Hence, the good guy guarantee is born. So… in layman’s terms, a good guy guarantee is an agreement between landlord and tenant where both parties agree that so long as the tenant is current on monthly lease payments, the landlord cannot penalize the tenant for early withdrawal from commercial premises.
So now we end our Shakespearian play with:
Many adjustments have been made to the good guy guarantee since its beginnings over a decade ago. These have invariably included more obligations from the tenant to the landlord including, additional payments such as tax and operating expense obligations, removal of any items installed on the premises by the tenant, obligations to make sure all necessary repairs and other maintenance costs are covered by the tenant, only exiting premises with warning months in advance including payments of additional rent in the event the tenant defaults, reimbursement by the landlord for repairs and improvements paid for by the tenant, and other types of concessions.
The list goes on. One thing is for sure; what gets written in the contract is invariably the result of market trends, how the credibility of the tenant appears to the landlord, and how lawyers execute at the negotiating table.
This is not to say that the tenant could get off the hook so easily in a weak commercial market. If you were to take a look at five sample good guy leases you will find that the tenant has an equal number of parameters to end the lease.
So you might think, with all these adjustments written in the contract agreed by both parties, the tenant has given notice, vacated the office, and that’s the end, right?
Not so fast. Remember that the good guy guarantee is a separate agreement and is not a clause in the lease contract. The tenant still has obligations to the landlord in the event of default in payment. Sometimes lawyers miss this point as well.
So is this the end? Not so. As the good guy guarantee continues its path of ingenious adjustments and expansion in the commercial market, lawyers will continue to protect both sides and come up with more sophisticated solutions to problems that arise with time. And so legal acrobatics will invariably continue.
jbakersfield@bakersfieldlaw.com
Jonathan Bakersfield is the founder of Bakersfield Law in Long Island, NY.
