• September 13, 2020

Lesson: How Landlords Strengthen a Good Guy Guarantee

Lesson: How Landlords Strengthen a Good Guy Guarantee

In this segment, we’re going to talk about how GGG’s have been beefed up. What we have done as landlords and landlord’s attorneys (I’m sorry, but I’ve been guilty of it over the years) is strengthen the good guy guaranty (“GGG”) in a number of ways.

The first way we’ve strengthened the GGG is that we’ve made it a guaranty of both monetary and non-monetary obligations under the lease (indemnity, maintaining insurance, repairs and restoration obligations, etc.). If you are a tenant or guarantor thereof, you should attempt to remove non-monetary obligations from the GGG.

As it relates to the condition the tenant is required to leave the space in when it vacates, on a basic level, tenants want the obligation to return to the landlord the premises “broom clean and vacant.” What clever landlord’s attorneys will do though is insert into the GGG that the tenant must return the space “in the condition required under the lease,” instead of broom clean and vacant. Remember that all of the clauses in the lease interact with each other. In the Real Estate Board of New York (“REBNY”) form, Article 3 for example, there’s a repair and restoration obligation. Under that, which not many attorneys negotiate the way they should, there is a provision stating that the landlord, at its option, can require the tenant to remove all of the improvements in the space prior to lease execution. So if you’ve agreed in the GGG to return the space in the condition required under the lease and you haven’t negotiated that particular clause very well, and you have the aforementioned repair and restoration obligations, technically speaking, you could have paid rent through the date of surrender, given back the space broom clean and vacant and still technically be on the hook for not also removing all improvements from the space. Whether that flies or not in a court of law is another story, but the bottom line is to be aware of it.

It is very important for landlords to be mindful of the tenants’ obligation to give notice as to when they’re vacating your space. As the landlord, you don’t want to receive a call on December 30th from your tenant, stating that it is moving out on December 31st, giving you back the space broom clean and vacant, and paying all rent through that date. The bottom line is that you want advance notice. Our lease generally states that we are going to receive at least six (6) months advance notice from the tenant that they will be exercising their right to terminate the GGG. That means two things for me as a landlord: (i) For that period of six (6) months, I’ve essentially gotten a straight personal guaranty from the tenant’s guarantor and (ii) the second I get that notice, I’m calling my broker to start marketing the space so that I can hit the ground running and hope there will be little or no vacancy turnover in the space. It is not uncommon for a GGG to provide for advanced notice between ninety (90) and one hundred eighty (180) days. The lesser the amount of notice required, the better it is for the tenant/guarantor.

Yet another case of how we as landlords have injected HGH into our GGG’s over the years is that we’ve added language that creates additional conditions before the guarantor can unilaterally terminate the GGG. In addition to paying the rent through the date of surrender and delivering the space broom clean and vacant (and maybe then some), some GGG’s also require that the landlord must be reimbursed for its unamortized free rent concessions, tenant improvement allowances, brokerage commissions and its cost of landlord’s work. In my earlier example in part one, where I talked about a lease with a term of ten (10) years for a 10,000 square foot space at $50 per square foot of rent, where the cost upfront is ballpark $800,000 to a landlord. If the tenant goes belly up in year five (5), under this GGG with this language just discussed, the tenant will have to pay, in addition to the rent through the date of surrender, about $400,000 to $500,000 in landlord’s unamortized costs.

It’s mind boggling how many attorneys and tenants don’t focus on this. If I’m representing a landlord, it’s a beautiful thing. If I’m representing a tenant, I take my pen and I put a big “x” through it. That’s not always the case, though, from a tenant’s perspective. As a landlord’s attorney or as a tenant’s attorney, I channel Fiddler on the Roof and the song “Sunrise, Sunset,” and I insert into the GGG that if the tenant gives back the space during the first five (5) years of the lease (sunrise), then the tenant has to pay back the unamortized cost. But if they give back the space and terminate the lease after the 5th year, then the responsibility to pay back the unamortized cost goes away (sunset).

Depending on the landlord I’m representing, in many cases, I’m able to agree to a sunrise/sunset provision. When a tenant puts an “x” through the clause, I will say to the tenant’s attorney, that’s just not going to happen. We’re just here trying to minimize the short term risk to the landlord, and remember that we only got $100,000 to $200,000 from you (or whatever the number may be for the security deposit) when we laid out $800,000. How can you be asking us not to share a little bit of the risk with you? If you truly think that you’re going to put your blood and sweat into this space and you definitively know that you’re going to be there for 2-3 years, you should have no problem agreeing to this GGG. You want the goodies from me as a landlord, you have to play a little and understand that life requires trade-offs. So what will happen many times is that we’ll agree to a sunrise/sunset provision that basically states, “if you give back the space during the first three (3) years, you have to pay me the unamortized cost. If you pay me back after three (3) years, it’s as if this reimbursement language is not in the guaranty.” It’s a beautiful thing and it’s once again the happy/sad compromise that we all seek.

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