• September 13, 2020

Lesson: Exit Strategies from a Good Guy Guarantee

Lesson: Exit Strategies from a Good Guy Guarantee

Tenants, and more particularly, guarantors, need to keep in mind that virtually all guarantees contain language, and rightfully so, that the guarantor will remain on the hook when the lease is assigned. The bottom line is that the good guy guaranty (“GGG”) does not go away. So tenants and their guarantors need to make like Gumby and the Rubberband Man and create as much flexibility for themselves as they can and attempt to include provisions that will allow for the release of the guarantor if a sale of the business or an assignment of the lease occurs, subject to having at least one or more of the principals of the assignee that you assigned the lease to signing a GGG in similar form to what you signed. It is extremely important to get that language into the GGG. If I was asked as a tenant’s attorney to only negotiate two aspects of a lease, one would be (1) the assignment and subletting clause, because I need that flexibility, since a lot can happen during the term of a lease, and (2) the second would be the GGG. These two provisions go hand in hand.

Another detail that I will seek to put into the GGG – and once again I put this in the LOI if I’m representing a tenant – is when more than one principal will be signing as a guarantor, that if one of those principals later withdraws from the corporate tenant, the obligations of the withdrawn member under the guaranty may be terminated unilaterally by that withdrawn party, provided that the remaining guarantors remain as guarantors. This is something AGMB negotiated for in our GGG for our lease where four (4) of the principals here signed the GGG as guarantors. If we didn’t negotiate the foregoing in our GGG, if one of the principals leaves the practice, he would still be on the hook under the GGG, and that’s not a good thing. We could agree amongst ourselves that we’re letting him out of the GGG, but as between the departing principal and the landlord, he’d still be on the hook, plain and simple. However, because of the foregoing language that we negotiated for in the GGG, as long as we inform the landlord in writing that it’s ok to let the leaving principal out of the lease, the landlord will allow them to be removed from the GGG. It is such an important tool to include, so please be cognizant of this if you’re wearing the tenant hat.

I’ve gone through all of these various restrictions, and the bottom line is that they’re all pro-landlord and anti-guarantor. The flip side of it is that sometimes in life you have to take a negative situation and turn it into a positive one, which is part of my daily mantra. For example, in a recent LOI that I backstopped for a residential broker, we were trying to bid on a very high profile retail location, and if we didn’t use some of the aforementioned anti-guarantor GGG tools to our benefit, we would not have even been in the top ten for the space. Although, going in, we weren’t even close to being in the wedding party, as a consequence of using these tools, which I’ll further explain in a moment, we ended up being one of the lead bridesmaids, maybe even the maid of honor.

We said to my tenant who was well-capitalized, “Are you going to put your blood and sweat into this space for a few years?” To which he replied, “Absolutely yes.” I then said, “Will you guaranty the payment of rent, as a straight guaranty for the first few years of the lease?” He said, “Yes.” I said, “If you’re going to be in this space, will you guaranty that if you go belly up in the first few years, that you will pay back the landlord’s unamortized costs which would be plentiful?” And the guarantor once again said yes. So we put in the LOI that the guarantor will guaranty the first two (2) years of rent and we will pay back the unamortized cost and so on. As a consequence, it came off that the tenant and guarantor were represented fairly decently, that they were very reasonable people, they had substance, and the bottom line is, my client got into the wedding party, so to speak. The point being, sometimes you have to look at the picture as a whole and figure out how to take something that’s not a good thing and turn it into a positive.

With regard to GGG’s and fixed and additional rent, the definition of additional rent in a lease is essentially everything that isn’t fixed rent. As a consequence, not only does it apply to taxes and operating expenses in the lease, it also goes a step further, and can be construed as applying to any monies that may be due as a consequence of a breach of non-monetary obligations. The point being that you should try and limit the definition of additional rent in the GGG to taxes, or if you have an operating expense clause in your lease, taxes and operating expenses.

I think it goes without saying that a GGG is one of the most important components of a lease to a landlord and a tenant. It would behoove tenants to reinforce a landlord’s trust by committing to some of the terms in the GGG because down the road, it will certainly pay dividends for you in the form of the goodies you will get from the landlord. The however is, a balance must be struck and a tenant must be careful not to sign a GGG that includes terms it’s unclear of because there are many unfavorable terms that are contained in the GGG.

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