At Shenwick & Associates, we are receiving many calls and emails these days from clients regarding leases which they would like to terminate and the principals' exposure for guarantees and good guy guarantees associated with those leases.
Most commercial tenants in New York City are organized as either corporations or LLCs and those entities are the tenant on the commercial office lease. Almost all landlords in New York City will require a principal or principal’s of the corporation or LLC to guarantee the lease.
There are two types of lease guarantees in New York. A full or complete guarantee for the payment of rent or a “good guy guarantee (“GGG”)”, which is a specialized type of guarantee, which can limit the payment of the guarantor under the lease, if certain conditions enumerated in the GGG are met.
Under the full or complete guarantee, for example if the tenant fails to make lease payments for 6 months and owes $50,000 for rent and additional rent under the lease, the Landlord can demand that the guarantor pay those monies and if payment is not made, the Landlord can sue the guarantor for $50,000.
The second type of guarantee which is known as a good guy guaranty limits the principal’s exposure under the guarantee if certain conditions are met. To be a “good guy” means that the tenant vacates the space and delivers possession to the Landlord without litigation.
An example of how GGG operates is provided below.
The GGG provides that the principal’s financial exposure under the GGG terminates when: 1. the tenants sends notice to the Landlord that it is vacating the leased space (the usual notice required is 90 to 120 days), 2. the tenant must be current on its payment of rent and additional rent, when it sends the notice to the Landlord or current on rent when it vacates the space, 3.the space must be left “broom clean” and 4. keys for the office must be delivered to the Landlord.
Under this scenario, if all 4 conditions are satisfied, the guarantor is released from liability under the Lease. However, if the 4 conditions are not satisfied the guarantor’s liability continues until the lease expires.
If the tenant is unable to pay the rent due under the lease when it vacates the principal will often pay the rent for the tenant to terminate the GGG.
It should be noted that just because the tenant vacated the space, the lease is not terminated and the tenant remains liable for rent until the lease terminates. If the tenant does not pay the rent, the landlord can sue the tenant but not the guarantor.
Under that scenario, the tenant will either close its business or file for chapter 7 bankruptcy.
As can be seen from the above examples, a GGG is a more limited form of guarantee.
The statute of limitations for a landlord to commence an action under a guaranty under New York State law is 6 years. CPLR 213(2)
Under New York custom and practice, the guarantee whether it is a regular guarantee or a GGG can be incorporated into the lease or it can be a separate document.
Under certain limited circumstances based on a NYC administrative law, certain guarantees are void see New York City Administrative Code §22-1005, which provides for the suspension of certain contractual obligations between March 7 and Sept. 30, 2020. The law is applicable to leases for restaurants, bars, retail establishments and other similar non-essential businesses that were required to cease operations due to various COVID-19-related executive orders issued by the Governor. If a guarantor can avail themselves of that law, then the guarantor may be able to avoid liability even if the tenant does not pay rent under the lease.
From a landlord’s perspective once they obtain possession of their space, they need to determine based on cost benefit analysis if they want to sue the tenant or the guarantor for rent that is due and owing. The landlord will consider the cost of litigation (legal fees and court costs) and the ability to collect on a judgment, if one is obtained.
Due to the covid virus, many Landlords are taking a wait and see attitude and not commencing lawsuits immediately, as they may have in the past.
A tenant that wished to vacate a lease should have the lease and the guarantee reviewed by an experienced attorney and the tenant and guarantor need to develop a strategy to deal with the landlord.
Any clients having questions regarding a terminating a lease or with respect to a guarantee or good guy guarantees should contact Jim Shenwick at 212-541-6224 or email him at jshenwick@gmail.com. Jim Shenwick negotiates commercial leases, practices debtor creditor law and bankruptcy law.
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