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Advantages of a 'good guy' lease guaranty.

Lease transactions involving tenants that do not have significant hard assets--such as law firms or other professional services firms--and that are reluctant to provide large cash security deposits or letters of credit, pose some challenges.

How can such prospective tenants give landlords the comfort level they need that they will be able to regain possession of the demised premises promptly in the event that the tenant defaults?

One method that has become fairly common during the past decade regardless of the size of the lease is the so called "Good Guy" Lease Guarantee.

In essence, these guarantees require one or more of the principals who control the tenant to personally guaranty the lease, with that guaranty expiring upon delivery of possession, along with any rent owed up to that date and the security deposit under the lease.

This creates a major financial incentive for the individuals controlling the tenant to act as "good guys," and vacate the premises in the event of a default. It also provides some protection to landlords concerned about the possibility of being faced with a tenant who can't pay the rent and refuses to vacate.

Good Guy Guarantees are often referred to by the misnomer "good guy clauses"--a misnomer because the operative provision is not a clause in the lease but, rather, a separate guaranty of the lease, which often is not even mentioned in the lease even though they are executed simultaneously.

The Good Guy guaranty uses the classic carrot and stick approach. If the tenant is in default and refuses to vacate the premises, the individual guarantors face a personal downside. If the tenant delivers vacant possession of the space to the landlord, then these individuals are personally off the hook, except to the extent of their obligations through the date of delivery of possession.

Once the Good Guy Guaranty is complied with, the landlord looks only to the tenant for its future rent and other damages.

There are a number of variations on Good Guy Guarantees, but following are some of the most common:

* The most favorable to the tenant merely requires delivery of vacant possession of the premises whereupon the guarantor is released from liability for the payment of rent.

* The guaranty most favorable to the landlord requires delivery of vacant possession of the premises with all monetary and performance obligations fulfilled through the date of delivery of possession, including the restoration of the security deposit. This imposes the greatest burden on the guarantor because it involves both payment and performance obligations.

* The middle of the road form of Good Guy Guaranty requires delivery of possession with all monetary obligations fulfilled through the date of delivery of possession but without the requirement to fulfill performance obligations.

Many such guaranties do require compliance with certain specified performance obligations such as restoration of the security deposit, restoration of unusual improvements (such as a vault or interior staircase) and removal of all personal property from the premises.

Under all Good Guy Guaranties, after the release of the guarantor, the landlord still retains the right to sue the tenant for damages for the remainder of the lease term and any other performance obligations; however, the guarantor has now fulfilled all of its obligations.

During the last economic cycle, fueled by the technology boom, large amounts of space were leased to relatively new companies bolstered by venture capital. When the bubble burst and these companies ran out of cash, landlords were put in a very tough position--shrinking demand for space, falling rents, and tech tenants that couldn't pay the rent, wouldn't vacate the space, and had no hard assets. That prompted the desire by landlords to obtain additional security.

In a market where eviction actions generally require three to six months at a minimum, even if the tenant does not oppose the eviction, and longer if the tenant actively objects to the eviction--or worse, files for bankruptcy, a Good Guy Guaranty combined with a reasonable security deposit is often a good solution.

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Author:Moerdler, Jeffrey A.
Publication:Real Estate Weekly
Date:Oct 11, 2006
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