New restaurateurs deal with so many legal issues as they get started that it’s easy to overlook one or two. The ”good guy guaranty” - sometimes called a ”good guy clause” - is something no owner wants to skip over. No matter how old-fashioned its name might sound, a restaurant lease may still demand it. Here is what it really is, and why it can cause so many problems.
Choosing your restaurant location is one of the most vital decisions in the opening process. It should be based on detailed, market-research driven knowledge of where you fit into the local dining economy. Every decision should match your brand and overall concept. Too often though, brokers treat location as a contest of speed. They rush owners toward restaurants as though they were bidding at an auction: this “highly sought-after” space is not on the market for long, don’t let someone else beat you to it. In most cases the owners work on a term sheet with the landlord before the lease gets written. That covers basic things like rent and the dates the lease starts and ends. The landlord may also ask for something called a “good guy guaranty,” sometimes just as a part of the term sheet or in the lease itself. This is a limited personal guaranty, meaning it limits how much and under what conditions the owner can be held personally responsible for the rent. It does this by making the owner responsible for rent only if the tenant leaves without handing the space back to the landlord. One big reason landlords like personal guaranties is that they want to charge low security deposits. That keeps capital costs low for owners.
Good guy clauses look like boilerplate at the bottom of addenda covering more important-sounding things (alterations, insurance, the hood venting system) so it is easy to skim over. But make no mistake: the good guy clause is far from boilerplate. Each landlord may do it differently, with its own definition of what being “good” means. Understanding its terms is vital to understanding your liability.
Properly Surrendering Possession of the Restaurant
Instead of full responsibility for the rent no matter what, you only have to pay if you walk away (or are evicted) without properly surrendering possession of the restaurant. Brokers tell owners it is no problem: basically a walk-away right, just hand over the keys and the lease ends. Walking away, however, is not as simple as getting up one day, closing the door behind you and leaving for the last time.
A sample clause reads: “End of Guaranty. The Guaranty provided for herein shall end with respect to any and all matters arising after Tenant has vacated and surrendered the Demised Premises. Tenant shall give Landlord at least sixty (60) days prior written notice of the anticipated “Possession Date”. “Possession Date” shall mean and be defined as the date upon which Tenant shall surrender and deliver up the Premises to Landlord, pursuant to and in accordance with the provisions of the Lease. This provision shall be effective only upon the full and complete compliance with the following conditions: 1. Tenant surrenders and delivers the Premises pursuant to the provisions of the Lease, to Landlord, on or before the Possession Date; and 2. Tenant pays, on or before the Possession Date, all unpaid Rent through the Possession Date.”
How the landlord defines ”surrender” - surrender the premises “pursuant to and in accordance with the provisions of the Lease” - is critical. Should you replace anything you installed (improvements or fixtures)? Should the premises be “broom clean”?
New York courts have said that “pursuant to the terms of the Lease” means every condition in the lease concerning surrender, not just the broad “broom clean” definition. Even if you lock the door behind you on the last day and hand the keys to the landlord, if the lease requires written consent from the landlord to surrender, you may not have really handed back possession. And the guarantor might remain liable for rent until the full lease term.
You Are Still Liable for Rent
The clause only ends the guarantor’s personal liability. It does not end the obligation to pay rent through the end of the lease term. It does not waive any of the tenant’s obligations under the lease. The lease goes on, and while it does, so does the tenant’s responsibility. Say your lease ran for 10 years, but the restaurant failed after 1 year. The company would still owe 9 years of rent.
Notice periods usually are negotiable. Guarantors want short notice periods so they can know when the guaranty ends. The longer the landlord has to find a new tenant, the longer the guarantor pays. If the clause requires 60 days notice, missing that deadline may mean you have not complied with the lease. The guaranty does not end, and you are still liable for rent. Some guaranties require sending notice by certified mail, which requires proof of receipt. A mere email and text of a picture of the keys on a desk in the darkened, locked and empty restaurant space may not be enough.
Four Ways to Avoid Being Trapped
Good guy clauses are a trapdoor an owner can easily stumble on. There are four ways to avoid being trapped:
First, ask for the right to give notice of your intent to exit as soon as possible, and keep the steps to end the guaranty short and simple. The process should never require landlord consent, or else you cannot know when, or if, it will end. For long, confusing clauses, ask the landlord to draft a simpler version. Wording along these lines helps: “The guaranty’s terms apply as long as Tenant remains in possession of the premises. If tenant no longer occupies the premises and hands the keys to Landlord, vacating and removing all Tenant property, the guaranty ends, and the landlord has no right to call the guarantor for payment.” You could even add “without the need for any consent from landlord.”
Second, put all the conditions in the guaranty itself, not in cross-references to the lease. This way, you see everything you have to do right there, without having to go hunt all over the lease. If possible, just copy over the lease conditions word for word.
Third, tackle the issue right at the beginning, as part of negotiating the term sheet. This is the best time to work out your surrender conditions and notice period. Also, the less you have to get into later during the lease drafting, the better, as negotiating term sheets tends to be far easier than dealing with landlords during lease talks.
Fourth, run down the landlord’s list of surrender items one last time. Go over the guaranty clauses. Call your lawyer before you hand back the space. It may sound melodramatic, but it could take only one missed detail to leave you trapped with long-term financial liability.
About Delancey Street
Delancey Street is a premier, and award winning, business debt settlement company that helps business owners nationwide. Our goal is simple: help you escape debt in a safe and legal manner. Based out of New York, we can help in 49 of 50 states. We tell you how it is; because your business and future is on the line.
