Most commercial leasing attorneys negotiate guarantees on a regular basis. To an experienced attorney, these somewhat abstract principles make sense. To the parties themselves, however, the guarantees are sometimes the source of confusion, angst and disagreement. The purpose of this article is to explain in simple terms why attorneys use guarantees, the different types of guarantees, the terms and conditions that are often negotiated, and why guarantees matter on a practical level, and why parties should address the issue early in the negotiation process instead of “punting.”
What is a guaranty?
A “guaranty” is a type of promise. Most people are familiar with a guaranty on a loan whereby an individual promises to repay a loan to a business entity if that entity defaults. In the case of a commercial lease, a personal guaranty is an individual’s promise to satisfy the tenant’s obligations under the lease if the tenant is a business entity and that entity defaults under the lease.
What are the different types of guarantees?
The two basic types of guarantees are full and limited. In a full personal guaranty the guarantor promises to undertake all of the tenant’s obligations if the tenant defaults under the lease. In a limited personal guaranty, the guarantor’s liability is limited as per the terms of the agreement. For example, the guarantor’s liability may be limited to a specified amount of rent provided certain conditions are met, e.g. tenant vacates the premises and leaves the premises in good condition. This type of agreement is commonly referred to as a “Good Guy Guaranty” or a “Limited Good Guy Guaranty.”
What terms and conditions are negotiable?
Each deal is different. Depending on the situation the Guaranty may or may not be negotiable. When Guarantees are negotiated some of the terms and conditions that are discussed include: (i) who is required to act as a guarantor; (ii) the maximum dollar limit of the Guarantor’s liability; (iii) the duration of the Guaranty; and (iv) the amount of notice tenant is required to provide before vacating.
When Do Guarantees Become Relevant?
Guarantees come into play when a tenant defaults. The lease agreement typically requires the landlord to serve the default notice on the tenant and guarantors. If the tenant fails to cure the default within a specified time period, the landlord may have the right to terminate the lease and seek damages against the tenant and the guarantors. If there is more than one guarantor they may be jointly and severally liable, meaning that each guarantor may be responsible for the entire amount due, and the landlord may be able to look to the guarantor for payment before looking to the tenant.
Parties to a commercial lease sometimes give short shrift to the personal guaranty, relying on the attorneys to “work it out.” It is respectfully submitted, however, that the parties may wish to discuss the terms of the personal guaranty, if any, early in the lease negotiation process to ensure that the parties are in agreement as to the scope and duration of the guaranty. For example, for a commercial tenant, a full personal guaranty may be a deal breaker. Better to find that out early in the process than after spending time and money on both sides of the transaction.
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The Law Offices of Keith R. Betensky, Esq.
The Empire Building
26 Village Green, Suite 4
P.O. Box 22
Bedford, New York 10506-0022
(914) 338-8050
keith@betenskylaw.com