Sunday, November 03, 2019

The Closed Restaurant and Guarantees and Good Guy Guarantee of the Restaurant Lease

In our continuing series of posts on failed or closed restaurants, many clients have asked us to review the custom 
and practice and the law regarding guarantees and  good guy guarantees for restaurant leases.

 Most restaurants in New York are owned by a limited liability company (“LLC”) or a Subchapter S corporation. 
That entity will set up and run the restaurant and the LLC  or S corporation stock will be owned by an  individual.

 In negotiating the restaurant lease, all Landlords will require that the owner of the LLC  or the S corporation 
guarantee the lease.

There are two types of lease guarantees in New York. A full or complete Guarantee for the payment of  rent or 
additional rent by the restaurant under the lease. Under this type of Guarantee, if a restaurant fails to make
lease payments for 6 months  or any period of time and owes $50,000 for  rent and additional rent  under the lease 
and these monies are not paid by the restaurant, the Landlord can demand that the guarantor pay those monies and if 
payment is not made, the Landlord can  sue the individual that owns the restaurant/guarantor for that sum of money. 
This is an example of an unconditional or unlimited guarantee by the restaurant owner to the Landlord.

 The second type of guarantee is what is known as a “Good Guy Guarantee (“GGG”)”, which is a specialized type of guarantee 
which limits the payment  of the guarantor under  the restaurant lease, if certain conditions enumerated in the GGG are met.  
If the restaurant performs those conditions, the guarantor is released from its  obligations under the Lease. 

An example is provided below. 

Example, many GGG require that the following conditions be performed by the restaurant in order for the GGG clause 
to come into effect and to limit the restaurant owners exposure to the Landlord for future rent. 1.  the restaurant  
must be current on its payment of rent and additional rent, when the GGG sends a letter to the landlord indicating that 
the restaurant is closing, 2 . written notice must be given to the Landlord (as specified in the lease) regarding the 
date of the  closing of the restaurant a certain number of days in advance of the closing date  (usually 45 to 60 days), 
3.the restaurant must be left in  “broom clean” condition and 4. keys for the restaurant must be delivered to the Landlord. 

Under this scenario, if all 4 conditions are satisfied, the guarantor is released from its guarantee under the Lease. 

However, the restaurant remains liable for the remaining rent and additional rent due under the Lease, unless the Landlord 
releases the restaurant from future rent (by the parties entering into a Lease Surrender Agreement) or the restaurant’s lease 
is subleased or assigned to a 3rd party in accordance with the terms of the Lease and  with the consent of the Landlord. 

As can be seen from the above examples, a GGG is a more limited form of guarantee. 

Under New York custom and practice, the guarantee whether it is a regular guarantee or a GGG can be incorporated into the 
terms of the lease,  but it must be signed and dated by the guarantor and the guarantor is usually required to give his or 
her social security number  and home address to the Landlord.

The guarantee or good guy guarantee can also be its own  separate document  and it is usually two to five pages long.

Before a restaurant closes, the lease and the guarantee, should be reviewed  by an experienced attorney to determine what 
conditions must be met. Any clients having questions regarding a closed or failed restaurant and lease guarantees or good guy 
guarantees should contact Jim Shenwick at 212-541-6224 or  email him at Jim Shenwick negotiates leases, 
practices bankruptcy law and represents failed or closed restaurants. 

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