One of the negotiating points of any lease deal is whether the tenant will personally guarantee the lease. Many small start-up businesses are quickly formed with little capital. If the tenant’s business fails, the landlord is left to try and relet the space and maybe pursues the tenant for damages. I say “maybe” only because in many instances pursuing the breaching judgment-proof tenant is an exercise in futility.
An extra level of security, of course, is to have a principal or principals of the tenant personally guarantee the tenant’s performance under the lease. Many landlords, desirous of leasing space, will only push so hard for a guarantee in these relatively difficult economic times. Informed tenants know this and will resist signing a guarantee. How do you break the impasse?
Either one side gives in or the parties try and cobble together a middle ground both can live with, usually in the form of a limited guaranty. A guaranty can be limited in any number of ways depending upon the willingness of the parties and the creativity of their attorneys. One form of a limited guaranty is what is known as the “good guy” guarantee. A good guy guarantee in its simplest form provides that the guarantor remains liable on the lease up through the time the tenant surrenders possession back to the landlord.
It would make sense for a landlord to agree to this in, say, New York, where regaining possession of leased space from a non-paying and obdurate tenant can take some time. In New Jersey, however, the summary dispossess process is relatively speedy thereby diminishing the utility of a pure good guy guarantee. One way for New Jersey landlords to add a bit of heft to a proposed good guy guarantee is to require the tenant to give 3 to 6 months’ notice prior to vacating. This gives the landlord the opportunity to start looking for a new tenant prior to the current tenant’s departure. In the event the tenant vacates without giving the requisite notice, the guarantor is on the hook for that amount of rent, subject to the landlord’s duty to mitigate.
Tenants too need to be vigilant when negotiating a good guy guarantee. Situations such as assignment, subletting, or sale of the tenant’s business should be taken into consideration and, if necessary, addressed in the good guy guarantee. Failure on the part of the tenant to do so could mean the difference between the guarantors owing little or nothing to the landlord or owing a lot more than they bargained for.