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Commercial Landlord/Tenant Law | December 2016

Good Guy Guaranty: A Good Idea for Landlords

A Good Guy Guaranty can relieve some of the landlord's headaches when a commercial tenant defaults on its lease.

One of the vexing problems for landlords is the defaulted tenant that will not leave.

A landlord may have rented office or retail space to a small business. Everyone hopes and believes all will be well. Everyone is often wrong, and the business hits financial bad times. While they are circling the financial drain, the tenant stops paying rent but refuses to voluntarily vacate. Or, after they fail completely, they abandon the premises, leaving behind furniture and fixtures that the landlord neither owns nor wants.

During this sad dance the landlord has some rights that are very solid – and expensive to enforce. When rent initially stops, the landlord can change the locks and retake possession. But that entails expenses for locksmiths, security and, of course, attorneys to post the proper notices.

Once the tenant has abandoned or been locked out, the landlord can take possession of the premises and its contents. But there are very specific legal requirements about protecting that unwanted personal property, properly storing it, and eventually disposing of it. The landlord may also be exposed to liability if a third party’s property (e.g., a leased copy machine) is lost or damaged while it is in the premises.

If the tenant is a corporation or LLC, and if the landlord agreed to execute a lease without personal guaranties, the tenant is essentially judgment-proof.

In short, this is a landlord’s nightmare.

Good Guy Guaranty

There is a middle ground, and it is one that should be utilized more often.

At the inception of the lease, when the parties are on good terms, most tenants will agree to sign a “Good Guy Guaranty”: a limited personal guaranty by the principals of the tenants that, while acknowledging there is no personal liability for performing the ordinary terms of the lease, does impose a personal but limited guaranty.

The tenant’s principals covenant that the landlord can reclaim the space (regardless of the reason for the lease termination) in substantially the same condition as when rented, and within a stated time of that termination. If they refuse to go, or leave it in disrepair, they still will not be liable for all future rent, but the landlord can collect from the individuals for costs of repair and cleanup, storage and disposal of the abandoned personal property, as well other expenses for attorneys, locksmiths and the rent that was lost while the property was being made marketable again.

With a Good Guy Guaranty, the principals of the tenants promise to be good guys, and that is a good idea. The renters are satisfied, in that it is clear they are not personally responsible for the orderly termination and vacating of the premises, and the landlord has some assurance that he will spend less time and money getting possession after the lease has ended.