A reader of our blog asked a very good question regarding guarantees/guaranties and our post regarding the use of bankruptcy to terminate or end commercial leases in Manhattan, New York.
The question posed was how does one terminate or end a lease in Manhattan if the lease is guaranteed by a principal of the tenant?
Our response is below.
Our blog can be found at http://shenwick.blogspot.com/ and the post titled "Commercial leases in New York City, COVID-19, Recent Protests and a Strategy to End or Terminate Commercial Leases", dated SUNDAY, JULY 12, 2020 can be found at https://shenwick.blogspot.com/2020/07/commercial-leases-in-new-york-city.html.
First, if a commercial lease has a guarantee/guaranty, terminating the lease without addressing the underlined guarantee, is of no value to the commercial tenant.
Second, there are two types of guarantees/guarantys with respect to commercial leases, there is a general guarantee (“Guarantee” ) which generally requires that the principal of the tenant guarantee the payment of base rent, additional rent and the performance of any requirements under the lease by the tenant.
Third, the second type of guarantee/guaranty is known as a Good Guy Guarantee (“GGG”), which requires the principal of the tenant to pay rent or additional rent until the tenant vacates the space, returns the keys to the landlord and leaves the space in a broom clean condition. Many GGG have a term limit, in which the good guy guarantee expires after a certain number of years, such as 2 to 3 years if there is no default under the lease.
Fourth, after being retained to terminate a commercial lease with a guarantee, we request a copy of the guarantee and review its terms to determine if it is a guarantee, a GGG or a guarantee that has terminated for some reason such as time.
Fifth, we then ask for financial statements from the guarantor, including a balance sheet and income statement.
Sixth, we then engage in asset protection planning for the guarantor to make it more difficult for the landlord to obtain possession of the guarantor's assets if there is a default under the lease or no settlement with the landlord.
Seventh, we then begin negotiations with the landlord, providing the landlord with the pro forma bankruptcy petition for the tenant and financial information regarding the guarantor. Often times we will also prepare a pro-forma bankruptcy petition for the guarantor, although a bankruptcy filing by the guarantor is always a last resort.
Eighth, we aim to convince the landlord that by doing a workout and releasing the tenant and the guarantor, the landlord will regain possession of its premises sooner, the landlord will save on landlord tenant and bankruptcy legal fees. The exercise is similar to that which we do when there is no guarantor, but with a guarantor there is another degree of difficulty or complexity, which is not insurmountable. Additionally, based on the time value of money, a dollar paid to the landlord today has greater value than the landlord being paid over three years and a bankruptcy filing by the guarantor.
Ninth, if we are unable to do a work out with the landlord, then the tenant can file a Chapter 7 bankruptcy and the guarantor can file either a chapter 7 bankruptcy ( liquidation) or Chapter 13 bankruptcy where the landlord will be paid back over three to five years or a Subchapter V Chapter 11 bankruptcy for the guarantor (the landlord would be paid over 3 years).