The Good Guy Guaranty: A Unique New York Institution The Benefits and Pitfalls May 14, 2020 The COVID-19 virus has caused many landlords The New York City Council’s summary of the and tenants to take a close look at their leases to legislation can be found here. determine how those leases hold up in a COVID- This legislation was enacted by the City Council 19 economy. What can be done to secure relief and remains subject to approval by Mayor De from rent numbers that reflect a pre-COVID-19 Blasio. Regardless of the fate of this legislation, market? What can be done to retain a tenant or good guy guaranties are likely to be with us for secure a tenant in an unsettled market? Whether many years. you are trying to get out of a lease, enter into a lease or retain a tenant, this process may start What are the benefits and pitfalls of a good guy with understanding a unique New York guaranty? A good guy guaranty may: agreement: the “good guy guaranty.” Reduce the amount of security that a tenant While good guy guaranties will be more and more might otherwise have to provide to secure a popular in a post-COVID-19 real estate market, as lease; capital is scarce and tenants are scarce, the New Offer an alternative to the tenant principal to York City Council may have had good guy guarantying performance of a lease for its guaranties in mind when, just this week, the entire term; and Council enacted legislation that prohibits the Provide the landlord with security and enforcement of a personal guaranty, if (i) the comfort that the rent will be paid to the date liability arose between March 3, 2020 and the landlord recovers possession of the September, 30, 2020 and (ii) tenant was premises. materially impacted by the COVID moratorium. 1 Lease obligations can often run into the millions of dollars, potentially bankrupting a guarantor, 1 One of the following conditions must be met to (b) The tenant was a non-essential retail invoke the benefit of this City statute: “1. The establishment subject to in-person limitations tenant satisfies the conditions of subparagraph (a), under guidance issued by the New York State (b) or (c): Department of Economic Development (a) The tenant was required to cease serving pursuant to Executive Order Number 202.6 patrons food or beverage for on-premises issued by the Governor on March 18, 2020; or consumption or to cease operation under (c) The tenant was required to close to members of Executive Order Number 202.3 issued by the the public under Executive Order Number 202.7 Governor on March 16, 2020; issued by the Governor on March 19, 2020.” 1 (often the principal of the tenant), while a good judgment against the tenant may be of little guy guaranty provides the guarantor with concern to its principals.2 comfort that she can control, in large part, the As with any document that is the product of extent of her liability. negotiation, good guy guaranties, if not properly The good guy guaranty arose from the morass of drafted, may extend the guarantor’s liability far the overburdened landlord and tenant court beyond what the guarantor might expect: system. The essence of a good guy guaranty is Do Not Enter a Good Guy Guaranty Unless You found in the name: Be a “good guy.” Get out if Know How to Get Out you cannot pay. Do not take advantage of the legal system by remaining in a space for months, The danger of a good guy guaranty lies in the and, sometimes years, while not paying rent; with situation where the tenant or the guarantor is the result that, eventually, a landlord recovers prepared to return possession to the landlord, possession of the premises, but has a large, but it not prepared or not able to satisfy the unsatisfied judgment for unpaid rent without a conditions to complete the surrender and solvent party from whom to collect the terminate the guarantor’s liability. deficiency. A good guy guaranty motivates the Maintain Control of the Tenant If a guarantor tenant to return possession to the landlord loses control of the management of the tenant, promptly when she cannot continue to pay the the guarantor may find herself in an untenable rent. situation: she may be unable to stop the accrual In the course of negotiating leases, landlords are of unpaid rent and other leasehold obligations willing to take less security when a tenant offers a and watch, essentially, without an effective good guy guaranty. With a good guy guaranty, remedy, as the tenant remains in the premises those who control the tenant are motivated to and the guarantor’s liability grows.3 return possession to the landlord as the Thus, before an individual agrees to guarantee a principal/guarantor may be liable for the rent lease, she must be certain that she will never lose deficiency until the tenant delivers possession to control of the tenant as long as the guaranty is in the landlord. place. Indemnities from others are helpful, but Under the accepted structure of a good guy they may not be sufficient, as, often, an guaranty, the guarantor’s liability ends when the indemnity is just a cause of action against another guarantor or the tenant satisfy the conditions set person or party. forth in the good guy guaranty. For example, such Similarly, if the guarantor is not in control of the conditions may include (i) paying the rent and all tenant, the guarantor should think very carefully other obligations under the lease to the date of about whether she should guarantee the tenant’s surrender, (ii) leaving the premises in the condition required under the lease, (iii) giving landlord proper notice of its intention to 2 Note, however, that if a landlord secures a surrender the premises as defined in the guaranty judgment against a tenant, it may seek to pursue an and surrendering possession to the right party. action for fraudulent conveyance or an action to pierce the corporate veil in an attempt to reach the What many good guy guarantors do not realize is principals or the parent entities. that only the guarantor is released from liability 3 Of course, if the guarantor loses control of the when the tenant or guarantor satisfies all the tenant, she may seek judicial relief, but, as we all conditions of the good guy guaranty. The tenant know, litigation takes time, is costly and a court may continues to be liable under the lease; but, not direct a tenant to vacate a premises merely assuming the tenant has limited assets, a because the guarantor’s liability will continue. 2 obligations. Obviously, unless the guarantor has all of the obligations are fully discharged.4 Thus, ultimate control of the tenant, the guarantor if a good guy guaranty has the relatively benign could be fired. If the guarantor is entering into a language: “The guarantor guaranties all rent and business with partners, and is removed from additional rent under the lease until the date of decision-making authority, or if the guarantor, as surrender,” the liability of the guarantor may be an employee of an entity, is fired, the guarantor far greater than the guarantor may realize. stands on the sidelines and watches, helplessly, For example, Rent and Additional Rent include as her obligations grow with each unpaid monthly what we can anticipate: base rent, taxes, rent obligation, much like a runaway train. operating expenses; but Rent and Additional Rent Best Practices: may also include: damage to the building caused by a tenant casualty, slip and fall judgments not Do not become a good guy guarantor without covered by insurance, litigation costs not ensuring that you will retain the ability to otherwise compensated, accelerated rent, and surrender the premises to the landlord for as judgments arising from tenant’s conduct, such as long as you are the guarantor. hazardous waste contamination. If, nevertheless, one decides to sign a good In addition, many leases provide that a landlord guy guaranty, make sure the guarantor is may accelerate the balance of the rent due under indemnified to the extent of her personal a lease upon the occurrence of a default. Thus, if liability from a party that has the authority to a tenant is late in payment of its rent, for as little surrender possession and make sure that as one month, a landlord might accelerate the party has sufficient assets to reimburse rent; and, if the good guy guaranty has not been guarantor for her liability, including attorneys’ discharged, the landlord may attempt to impose fees. upon the guarantor the entire burden of the Include in the guaranty a pathway to exit accelerated rent.5 liability such as: “(i) Guarantor’s liability under Landlords may also fold into the Guarantor’s the good guy guaranty shall cease (to accrue) obligations repayment of brokerage fees, abated at such time as she no longer holds her rent and other transaction costs. Tenants should current position in the tenant and notifies try to resist such efforts, remembering that the landlord of such event. (ii) Guarantor shall no longer have liability hereunder, in the event 4 The thinking behind this position is that the tenant that tenant shall deliver to landlord a good is already walking away from the lease and guy guaranty in the form herein executed by a defaulting thereunder. The landlord should not guarantor with the same or greater net worth have to sue the guarantor to secure the funds that than that of the good guy guarantor the guarantor has promised to pay.