CANCELING, TERMINATING, OR BREAKING A COMMERCIAL LEASE IN NEW YORK CITY AND THE GOOD GUY GUARANTY
Whether it is crime, quality of life, or economics, many small businesses are looking to terminate or break their commercial leases before they expire. Those tenants include retailers, restaurants or office lease tenants.
Mr. Van Nieuwerburgh, a Columbia professor, calculates that New York office space on average costs about $16,000 a year per employee. “That’s real money,” he said, “and companies will try to save that”. The article quoting Mr. Nieuwerburgh can be found at https://www.nytimes.com/2022/11/17/business/office-buildings-real-estate-vacancy.html
Many tenants looking to terminate their leases have contacted us regarding an early termination of their lease and the sticking point is usually the Good Guy Guaranty that the principal of the business signed. Strategies for dealing with Good Guy Guaranties are discussed below.
Jim Shenwick, Esq has represented over 500 tenants in commercial lease negotiations and he has an active bankruptcy and workout law practice.
BACKGROUND
In New York City, most commercial tenants are corporations or limited liability companies, and these entities are the tenants on the commercial office leases. The principal or principals of the corporation or LLC are almost always required to guarantee the lease in New York City.
In New York, there are two types of lease guarantees. The full or complete guarantee of rent payment or the GOOD GUY GUARANTY, which is a specialized form of guarantee that can be limited in duration, if certain conditions enumerated in the GOOD GUY GUARANTY are met.
As example, under a full or complete guarantee, if a tenant fails to make lease payments for 6 months and owes $50,000 for the remaining term of the lease, the Landlord can sue the guarantor for $50,000.
A second type of guarantee is known as a Good Guy Guaranty, which limits the principal's exposure under the guarantee. To be a “good guy” means that the tenant vacates the space and delivers possession to the Landlord and the guarantor complies with the terms of the Good Guy Guaranty.
Below is an example of how GOOD GUY GUARANTY operates.
The GOOD GUY GUARANTY commonly provides that the guarantor’s financial exposure terminates when the following conditions are met: 1. the tenant sends notice to the Landlord that it is vacating the leased space (the notice required is generally 90 to 120 days), 2. the tenant must be current on rent, when it sends the notice to the Landlord or 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.
If all four conditions are met, the guarantor is released from liability under the Lease. In the event that the 4 conditions are not met, the guarantor remains liable until the lease expires.
If a tenant closes for business or files for bankruptcy, and the conditions for the Good Guy Guaranty are not satisfied, the Landlord can or will sue the guarantor. The statute of limitations is 6 years.
What can the Good Guy Guarantor do?
The Good Guy Guarantor can engage in asset protection planning, prior to entering into the GOOD GUY GUARANTY or prior to terminating the lease, provided that that planning is allowed under New York State law and not a fraudulent conveyance.
The Good Guy Guarantor can file for chapter 7 bankruptcy to discharge the monies owed under the Good Guy Guaranty.
The Good Guy Guaranty can engage in workout negotiations with the landlord and/or threaten a bankruptcy filing or
The Good Guy Guaranty can do nothing and hope that the landlord does not sue the guarantor.
The optimal strategy depends on the facts and circumstances of each case and involves a thorough review of the lease, the guarantee and the financial situation of the guarantor.
Clients who have guaranteed leases can contact Jim Shenwick, Esq. 212 541 6224 jshenwick@gmail.com to discuss their options.
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