What is a Good Guy Guarantee and Why Is It Important?

A Good Guy Guarantee is a personal guaranty frequently used in New York commercial leases. The guarantee either appears as a clause in the lease or as a separate document by way of an exhibit to the lease a Good Guy clause is typically signed by the tenant’s principal, who personally promises to fulfill all the obligations under the lease. In exchange, the landlord agrees to allow the tenant’s principal to terminate the lease early, provided certain conditions are met, such as all rent being paid up through the date of surrender. In addition, the Good Guy Clause also requires (i) that the tenant gives the landlord sufficient notice of termination (usually 90 days) and (ii) that the tenant completely vacate the premises and leave it in “broom-clean” condition.  Provided the terms are met, as of the date of the surrender of the premises, the landlord releases the guarantor from all obligations under the lease.

The Good Guy Clause protects both the tenant and the landlord. The Good Guy Guarantee gives a tenant’s principal the ability to walk away from their obligations under the lease if the business fails.   The Good Guy Guarantee protects landlords because tenants who may default on rent are personally liable for rent during long eviction proceedings. Further, the Good Guy Guarantee incentivizes the tenant to surrender the premises earlier if the business is not profitable. The tenant’s principal will attempt to negotiate not signing any personal guarantee, but if the landlord demands one, opting for a good guy clause limits potential liability. In contemplation of the Good Guy Guarantee, it is prudent for the Landlord to thoroughly review the proposed guarantor’s financials. If sufficiently solvent, tenant’s counsel should negotiate a lesser security deposit. When dealing with start-up companies without sufficient assets, Landlords typically demand a personal guarantee, as opposed to a Good Guy Guarantee, from tenant’s principal(s).

In order to trigger the Good Guy Guarantee, the tenant must not be in default of any provisions in the lease, beyond any applicable cure periods, including non-payment of rent, when giving notice to the landlord. It is in the tenant’s best interest to negotiate the shortest notice period. In some instances, a landlord will attempt to negotiate that a Good Guy Guarantee cannot be exercised during the first few years of the lease term.  Unless otherwise negotiated, when exercising the Good Guy Guarantee, the tenant will lose its security deposit. The argument made by landlords regarding tenant’s forfeit of the security deposit is that the tenant is technically defaulting on the lease. However, by exercising the Good Guy, the tenant’s principal(s) are off the hook and are released from their personal obligations.

In certain circumstances, tenants misunderstand the ramifications of a Good Guy Guarantee and rely on it as a form of protection. Landlord’s usually include many provisions to a Good Guy Guarantee, substantially similar to those provisions contained in full, personal guarantees. It is advisable that landlords and tenants retain experienced counsel, such as Mava Law PLLC, to draft and negotiate a commercial lease.