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Good guy guaranties: landlord-tenant perspectives in tough times.

As an increasing number of tenants are experiencing economic difficulties and looking to wind down their businesses, more and more tenants are carefully examining their leases and lease guaranties to determine whether it makes sense for them to surrender possession of their leased premises.

In the New York City leasing market, this means that the good guy guaranty, a common form of lease guaranty, is fast becoming a critical focal point for both landlords and tenants in structuring lease work-outs.

A typical good guy guaranty requires a creditworthy affiliate of the tenant (often a principal investor in the tenant's business) to guarantee the rent obligations under the lease through the date the tenant surrenders the leased premises to the landlord.

By way of background, the good guy guaranty was originally created by landlords to motivate tenants to surrender possession and avoid arduous landlord-tenant litigation.

However, in recent years, the good guy guaranty has expanded and become an increasingly sophisticated document as landlords have sought to impose upon guarantors more and more hurdles before releasing them from liability. Accordingly, the parties to a good guy guaranty must closely examine the document prior to initiating any lease work-out discussions. Specifically, they should carefully consider the following points:

Scope of liability: The parties must first ascertain whether the good guy guaranty is limited to fixed rent or includes additional rental obligations, such as real estate taxes and operating expenses.

In some circumstances, the good guy guaranty may even include certain non-monetary obligations (e.g., unperformed repair obligations) or require the guarantor to reimburse the landlord for transaction costs in connection with the lease, including the unamortized cost of rent concessions, leasing commissions or tenant improvement allowances. Tenants should note that some costs, such as leasing commissions, may be difficult to quantify without consulting their landlords.

Prior notice: The good guy guaranty may require the tenant to give advance notice to the landlord before the guarantor is released from liability (typically between three and six months). In some instances, the guarantor may not be eligible for release until the end of a calendar month. The notice provision affords the landlord lead time to seek a new tenant for the soon to be vacated space.

Tail clause: The good guy guaranty may include a so called "tail" clause by which the landlord requires, as a condition of release, a lump sum payment payable at the time of surrender (typically between three and six months' fixed rent). This payment is meant to allow the landlord to recover a certain negotiated amount of the rental income that it would have otherwise collected had the tenant remained in possession.

Physical condition of leased premises: The good guy guaranty will almost always require as a condition of the guarantor's release that the tenant surrender possession of the leased premises in the same condition required by the lease at the end of the lease term.

Depending on the scope of these obligations, the guarantor may incur significant costs in removing tenant's property and leasehold improvements from the leased premises.

Security deposit: Most good guy guaranties will specify that the security deposit held by the landlord under the lease will not be applied to offset the guaranteed obligations. Therefore, tenants should be prepared, in addition to all other liabilities that they may be incurring on account of surrendering possession, to forfeit their security deposits.

Once the parties understand the scope of the good guy guaranty, they should be in a much better position to begin efficient and productive work-out negotiations. In proposing a work-out solution, tenants may attempt to reduce the total amounts payable under the good guy guaranty (including under any tail provision) or the requirements for giving advance notice, by offering some combination of immediate cash, immediate possession and an uncontested release of the security deposit.

Alternatively, cash strapped tenants may propose a deferred payment plan which may include an interest factor on the deferred amounts (in such events landlords may insist upon collateral to secure payment). Flexible assignment and sublet provisions may also give tenants more leverage in these negotiations. As part of any final settlement, the tenant should negotiate a full release of the guarantor especially because some of the release conditions of the good guy guaranty may be subjective in nature.

A landlord's response to any tenant work-out proposal will depend on the parties financial strength, rental market conditions, the remaining term of the lease and the tenant's ability to provide immediate cash and possession. Landlords should be advised to consult their mortgage documents to ascertain whether any final settlement will require their lenders' approval.

Finally, while it often appears that landlords have the upper hand in these negotiations due to tenants' dire cash flow or other financial or time constraints, it is essential to remember that especially given the condition of today's real estate market landlords may be heavily leveraged and desperate for immediate cash.

Therefore, tenants may use the lure of an immediate uncontested cash payment to landlords as a means of reducing their overall liability under the guaranties.

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Title Annotation:INSIDER'S OUTLOOK
Comment:Good guy guaranties: landlord-tenant perspectives in tough times.(INSIDER'S OUTLOOK)
Author:Walker, Samuel M.
Publication:Real Estate Weekly
Geographic Code:1USA
Date:Mar 4, 2009
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