Commercial Lease Guaranties- Legal Issues to Consider

guarantyMany landlords of commercial property  require that the obligations of the tenant be guaranteed by an individual or affiliated entity.  Most tenants of commercial leases are an entity, such as a corporation or limited liability company, whose only asset is the business engaged in the leased premises.  If the entity tenant cannot perform its lease obligations or leaves before the end of the lease, the landlord has no remedy besides renting the premises to a new tenant.  For this reason, most landlords require that an individual or entity closely affiliated with the tenant guaranty the tenant’s requirements.  That way, other assets of the guarantor may be available to the landlord if the tenant defaults under the lease.  This post will examine the various types of guaranties that may be requested by a landlord.

A full guaranty is the most broad, wherein the guarantor covers all of the tenant’s obligations under the lease.  Such obligations would include paying rent, real estate tax escalations, utility payments, common area maintenance payments, maintaining proper insurance, repair obligations and the like.  Landlords prefer this type of guaranty because there is no limit on the amount or extent of the obligation covered.  Also, the landlord does not need to meet any condition before enforcing the guaranty against the guarantor.

A partial guaranty is more limited.  Perhaps the obligations covered are only those that are monetary in nature or up to a certain amount.  Other limited guaranties may cover lease obligations such as keeping up with maintenance and repair obligations.  Partial guaranties could also “burn down” or “sunset” over time.  For instance, after a certain period of perfect performance by the tenant, the amount guaranteed reduces or the partial guaranty terminates entirely.  In partial guaranties, the landlord may need to meet certain conditions before it is enforced against the guarantor.

A “good guy” guaranty is the best possible type of guaranty from a tenant’s perspective.  In a classic good guy guaranty, the guarantor’s liability is terminated once the tenant surrenders the premises, delivers the key and pays rent through the date of surrender.  Your attorney should be mindful that a good guy guaranty may still present certain unacceptable terms to the tenant, such as extending the guarantor’s obligations for several months after the premises has been vacated or requiring conditions be met upon vacating like restoring the premises to its original condition.  Also, a tenant will want to limit the definition of rent in a good guy guaranty to the pure monthly rent charged, without additional items being included in the definition of rent, such as real estate tax escalations, administrative expenses and the like.

Tenant’s attorneys  should request that guaranty obligations are not triggered until the landlord has sought performance from the tenant first and that the guaranty terminate if the lease is assigned to another tenant.  In addition, a guarantor may want to request that the landlord seek reimbursement from the security deposit before pursuing the guarantor for payments due from the tenant.  Also, landlords should be required to notify the guarantor of a default and provide the guarantor with an additional time to cure the default, beyond that afforded to the tenant.  That way, the guarantor may be able to help the tenant by paying a few months’ back rent, instead of potentially being required to pay all sums due if the lease is accelerated.

Commercial leases tend to be long term situations, perhaps a ten year initial term with options to renew for additional five year terms.  It is prudent for a tenant’s attorney  to request that a guarantor’s obligations do not apply to amendments or extensions of the lease unless specifically agreed by the guarantor.  The rationale for this is that the guarantor was aware of the original terms when the lease was signed and agreed to back them up.  It is unfair to automatically bind the guarantor to lease amendment and extensions that may increase the amount of rent charged and impose other burdens on the tenant that the guarantor needs to support.

We are well-equipped to negotiate lease guaranties as a landlord may demand and as most preferential to a tenant as possible.