When a landlord enters into a commercial lease, they often find that the tenant is not only set up as an LLC, but has little or no assets to speak of. A tenant without significant assets presents a risk to the landlord, since the landlord may be unable to recover damages if the tenant defaults on the lease.
New York landlords can mitigate this risk by requiring the owner of the LLC, or someone else with significant assets, to sign a "good guy guaranty" as part of the lease agreement. A good guy guaranty is essentially a limited personal guaranty --- it typically requires the guarantor to guaranty all rent and additional rent up until the date that the tenant vacates the premises (if the tenant provides notice of its intention to surrender of the premises, leaves the premises in good condition, and satisfies any other conditions). If the tenant satisfies these conditions, then the guarantor will not be held responsible for any future rent due under the lease. As a result, if the tenant fails to pay all rent due, then the landlord may seek to recover the unpaid rent and other damages from both the tenant and the guarantor, increasing the likelihood that the landlord will be paid all of the rent due through the date the tenant surrendered the premises.
Although good guy guaranties are commonplace in New York commercial real estate leases, things can go astray if the landlord is not thorough and diligent in preparing the terms of the guaranty. In order to avoid some basic issues from arising, landlords should consider the following:
1. Due Diligence: Review the guarantor's financials and make sure that the guarantor has sufficient assets to cover any damages in case the tenant defaults.
2. Gather Information: Collect as much personal information from the guarantor as possible, including Social Security numbers, addresses, and any other financial information about the guarantor prior to signing the lease. This way, if you later sue and obtain a judgment against the guarantor, you will already have valuable information that will help you collect on your judgment.
3. Extrapolate Hypotheticals: Consider different issues that might occur if the tenant defaults under the lease, and how those scenarios would play out under the terms of the lease and the guaranty. For example, if a tenant defaults, the broker who found the tenant will still need to be paid commissions for the duration of the lease; does the guaranty include repayment of a portion of the broker's commission?
4. Income Stream: Be sure to include provisions that allow sufficient notice and sufficient payment to you from the guarantor in the event that the tenant seeks to surrender possession of the premises. For example, the good guy guaranty may require the tenant to provide 90-days' notice prior to surrendering the premises, so that the landlord has time to try and find a new tenant to maintain its income stream. In that case, as long as the guarantor complies with its obligations under the good guy guaranty and makes all payments through the 90 day notice period, the guarantor is off the hook. If the landlord wishes to recover future rents due under the lease, its only recourse is to go after the tenant --- usually a failed LLC that has gone out of business.
While taking these considerations into account is a good start to ensuring a profitable lease, don't go at it alone. With the help of an experienced attorney, landlords can significantly reduce the risk of losing a substantial amount of money when tenants default on their obligations under commercial leases.
If you have any questions about commercial leases and guaranties, or would like assistance collecting on monies owed to you under a lease and/or guaranty, contact us today.
Kenneth J. Katz
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