We’re going to continue on with our segment on minimizing short term and long term risks from both a landlord’s and tenant’s perspective. When it comes to a good guy guaranty (“GGG”), I’m reminded of Bambi, for the look that many tenants and their real estate professionals have on their face when they are discussed (like a deer in head lights). It also reminds me of the title of songs from Wilco and Lil Wayne, namely, “Misunderstood,” and from Led Zeppelin, “Dazed and Confused.” It is one of the most misunderstood clauses contained in a lease. With that said, regardless of which side of the leasing table you sit on, I will try and help you fight the fog on the subject with the words of Elvis Costello, “By bringing a bit of peace, love and understanding” to prospective landlords and tenants that they need before the terms of a GGG are negotiated.
In order to truly appreciate what a GGG is, you need to know how this type of guaranty evolved. From a landlord’s perspective, a landlord talking to a tenant says:
I want you, while you are in my space, to guarantee that I am going to be paid rent. I’m not going to be happy if you blow out of the lease in year four (4) of a ten (10) year lease, but the bottom line is, while you are there, you must pay me rent. What is going to incentivize you as corporate tenant to be a ‘good guy’ and pay me rent? Well, simply put, you’re going to have a principal or principals of the corporate tenant guaranty that, while in the space, rent is going to be paid. From the guarantor’s perspective, you have the right to unilaterally terminate the guaranty. All you have to do is give me notice that you’re leaving the premises, deliver the premises broom clean and vacant, give back the keys and pay all rent due and owing through the date of surrender.
Many tenants or the principals of a tenant will balk at the above. AGMB is sitting here right now on almost 20,000 square feet of property and we signed a GGG. The truth is, if you want gold from the landlord in the form of all the concessions that a landlord may give to a tenant, such as free rent, tenant build-out, improvements and the like, the bottom line is, there’s a price to pay for it. This is not applicable to a chain store or a Fortune 500 company when they go and sign a lease. With deep pockets and a good reputation, a tenant has leverage to forgo a GGG.
When the principals of a tenant hesitate to give the landlord a basic GGG (like the one described above), it sends up a red flag often perceived as foreshadowing a breach of the most basic of covenants a tenant makes to a landlord; to pay rent. Tenants need to realize that life is a trade-off, and as I said previously, if tenants are looking for a lot of love from their landlord in the form of various concessions, I highly recommend tenants sign a basic GGG (it is like giving “ice in winter” to a landlord). Landlords just want to protect themselves in the event their marriage with you as a tenant turns into a case of good lovin gone bad. Simply put, it’s not a lot to ask. Landlords view it as a statement that while you’re in the space, you guaranty that rent is going to be paid.
A common misconception among tenants is that they think that if they give back the space in year four (4) of a ten (10) year lease, that not only the guarantor is let off the hook, but the tenant is let off the hook as well. That could not be further from the truth! Remember that the tenant signed a lease, which, in my example, is a contract for ten (10) years. The reality is that it’s going to be in the landlord’s hands to say, “now that you as a principal are off the hook personally, I’m now going to decide whether or not to go after the named tenant.” If the tenant is in bad shape, landlord may not seek to extract blood from a stone. However, if it’s an entity that has substance and they’re operating all over town or they’re just doing a name change to try and get out of the lease, the landlord will likely go after them. So just remember, if the tenant gives back the space early and releases the guarantor, it’s not the termination of the lease, it’s just the termination of the GGG.
One other note on the guaranty before we get into how lawyers pump up these GGG’s with legal and business steroids that very well would make the Yankees’ A-Rod, as well as renowned cyclist Lance Armstrong, blush with pride: as to your security deposit, when a tenant gives back the space early and releases the guarantor because the lease is still in effect, as Bob Prince the famous broadcaster for the Pittsburgh Pirates back in the 1950’s used to say when a homerun was hit, “You can kiss that baby goodbye!”