“…and, of course, we’ll need the “‘standard’ good guy’ from the CEO”
A few years ago, I wrote a piece speculating that while the term was ubiquitous in our leasing community, no one knew what a standard good-guy guarantee looked like. That didn’t surprise me as I concluded there was no such animal. It all depends. In this column, I’d like to revisit that question and see if my answer is any different.
As a refresher, traditionally landlords sought to secure a tenant’s financial obligations with a security deposit (cash or LC), and for most companies the owner’s personal guaranty: an unlimited personal guarantee covering every single aspect of tenant’s lease obligations.
It was serendipity that as those company owners grew more and more wary of leaving their entire net worth on the leasing table, landlords narrowed their focus to who the real enemy was: the ultimate Blue Meanie tenant who simply stopped paying rent and started playing the “go-ahead-and-evict-me-but-you-know-its-gonna-take-six-months-or-more-and-meanwhile-I’m-living-the-rent-free-good-life-at-your-expense” game.
Enter, stage left, the “good guy,” the financially responsible individual (typically the owner of the company) who said while my company may be floundering and in arrears, I’ll sign on personally to take care of any rent shortfall to the date we vacate. Voila! The good guy becomes a limited guarantor. Landlord gets its money, and the premises were available for re-renting.
So the basic understanding was that the principal, the good guy, would guarantee that all rent would be paid through the date that tenant surrendered the premises, vacant, in reasonably satisfactory condition with the keys turned over to landlord’s agent. At the point where all those conditions were satisfied, the guarantor (not the tenant) (we’ll get back to that) was released from all further lease liability. Rather neat and simple right? (No. Stay tuned.)
The old full-blown personal guarantor was delighted with this new arrangement (after all, who wanted to be called a bad guy?) and the landlord, seeking a modus vivendi, also agreed. They say the devil is in the details, so there were a few items to be ironed out, including whether to guarantee one payment only? Payment and performance? If payment, what was to be guaranteed? Just basic rent? So-called additional rent (taxes and operating)? Additional rent based on the landlord converting a performance obligation (i.e., a repair item) into a dollar obligation? Accelerated default rent? What about end-of term obligations to restore the premises? Then, of course, landlords had to consider free-rent periods that had not yet been amortized—same as to TI work and construction allowances. O.K., might as well throw in substantial yet unamortized brokerage commissions and legal fees. And what about back-door liabilities and concerns from the guarantor’s point of view, including anywhere from two to six months prior notice being required, and how to get some protection in the sublease or sale of business scenarios. Ouch, almost forgot, where does all this leave the hapless tenant, with its security deposit now history and no rent relief available? Whew.
Well, I think I’ll stop this exhausting (yet, stimulating) recitation of good-guy questions and ask you kind readers to stayed tuned for next week’s column when—a la that jam-packed final episode of Breaking Bad—all will be revealed and sewn up in a (not so tidy) package.