Can you negotiate a personal guarantee? Yes, and you should. The guarantee a commercial landlord asks for is not set in stone. If you try to negotiate it, they might say no. But, why not ask? It’s more like a business demand that can be changed. Just because the terms of a lease are often negotiated, doesn’t mean a guarantee can’t be too. The tricky part is what you ask for. A good guy guaranty, so common in restaurant leases, is one of the most misunderstood and requires a certain amount of care to ensure it’s implemented correctly.
Restaurant owners know the old line that the three keys to real estate are location, location and location. Once a general area is chosen, brokers show spaces they call highly sought after and about to come off the market, and everything has to move fast. The basic terms, such as the monthly rent and the dates of the lease, go into a term sheet or letter of intent. To keep the upfront security deposit as low as possible, the landlord may ask for a good guy guaranty. Usually, the term sheet will discuss the guaranty in passing in one or two lines, without any particularity as to the content. The early deal-broking requires quick action by the tenant, who is encouraged to sign the term sheet before the landlord prepares the actual lease. A few days later a long lease and rider arrive, and at the very back of the rider, after pages of rules about rent, alterations, venting the hood and insurance, sits the guaranty.
The good guy guaranty is a limited personal guaranty that kicks in if you have a failure in your business, but it comes along with a bunch of strings attached. And the strings differ from landlord to landlord. If you stop paying rent and keep holding the property, the landlord can go after your personal assets. It is narrower than a full personal guaranty, but it is poorly understood, and that gives a false sense of security. For example, in a term sheet, the broker or landlord may tell you that it is a termination right, that you can walk away by giving back the keys, if the business fails. Does the good guy guaranty get me out of the lease? The short answer: No. Instead, as the guarantor, you have to satisfy certain conditions before you can walk away. You should never just sign the first good guy guaranty you see, even if it is the landlord’s form, because it is not a boilerplate document.
A typical clause releases the guarantor from liability under the guaranty for any matter or thing that comes up after the tenant moves out of the premises, provided that the tenant gives at least 60 days’ written notice of when it intends to vacate and turn over the premises in accordance with the terms of the lease agreement, and pays rent through the date it vacates.
The trap is that phrase about the terms of the lease. New York court decisions hold that the surrender requirement is not limited to a requirement that you turn over the keys, or that the space is left in good condition, and that every lease term that requires that you give the landlord something in order to surrender the lease counts, including a requirement that the landlord have to approve your decision to leave the lease early. You need to get the landlord’s written consent to surrender the lease, not just give back the keys. If you don’t, the landlord can still try to charge your personal guarantor for the remainder of the lease term. Depending on how the clause is drafted, the landlord keeps what amounts to a veto over whether you can use the good guy provision at all.
Read the wording closely, too. The sample says the guaranty shall terminate. It says nothing about the lease terminating. The lease doesn’t end; the guarantor’s obligations do. The lease is still in effect and the tenant is still responsible for the remaining rental payments. Take a 10-year lease and a restaurant that closes after year one. If the tenant fails, there are still nine more years of rent the tenant has to pay. If the tenant complies with the good guy provisions, the guarantor is off the hook for those remaining nine years. The key word is that the guarantor is released. The tenant is not.
Then there is notice. That 60 days in the sample clause is often open for negotiation, and shorter is always better for the guarantor, because the guarantor is on the hook for rent until the day the space is actually handed back. New York courts have ruled that the notice must be timely. Failure to give enough notice, and the court says, no excuses. You are still on the hook. There is also the method. If the guaranty says notice should go by FedEx or certified mail and the tenant emails it, the notice is invalid, and the guarantor is still on the hook.
Negotiate Before Signing
Can you change any of this? The answer is yes, and it is crucial to negotiate before signing the lease agreement. There are four places to focus.
First, outline clearly and concisely what the conditions are for exercising the good guy guaranty, and make sure they can be exercised without the landlord’s consent. If it’s too difficult to understand how you can return the space, then you should ask the landlord to clarify the wording. If it’s too confusing and vague, then it can lead to big problems. Avoid “call it if you want it” type of language, where a guarantor’s right to terminate the guarantee is dependent on the landlord’s discretion to agree. A friendlier clause lets the tenant leave the premises vacant and broom-clean, drop the keys at the landlord’s office, give at least 60 days’ prior written notice by USPS, UPS or Federal Express, and says outright that the landlord’s consent is not required, whatever the lease or guaranty says elsewhere.
Second, the guaranty should specify exactly what is required. There should be no reference to any other terms or provisions in the lease. If you do need to refer back to the lease, make sure to copy the language into the guaranty, word for word, so you know exactly what you are agreeing to.
Third, get the notice requirements and conditions in the good guy clause into the letter of intent or term sheet. Don’t leave it for last. It is better to settle those terms up front, rather than later, after you have been negotiating the lease and guaranty for weeks.
Fourth, if you have to close the business and turn the property back to the landlord, speak with your lawyer first. Only that way can you comply with every requirement of the guaranty and exercise the good guy provision the way it demands. If you have a good guy clause, read it carefully. And read it carefully now, because you’re going to need to be ready to execute it the moment you can’t make rent anymore.
Don’t settle for a boilerplate guaranty on a commercial real estate lease. Push for a tailored solution. A personal guarantee can be negotiated, but your leverage is greatest before you sign, and the details you negotiate decide whether the guarantee actually lets you walk away.
