Good Guy Guaranty, Limited Guaranty, or Personal Guarantees on Commercial Leases: A Primer
When a business is ready to enter into a commercial lease, there are important factors to consider. Leasing commercial real estate often requires a full personal guaranty clause to ensure payment and performance of the lease terms. These guarantees are essential to the transaction and a requirement of the landlord. If your business doesn’t have a track record or asset history, the landlord may require multiple individuals to sign as personal guarantors, which binds the person to pay tenant's obligations if the tenant defaults. This is called a personal guaranty.
What is a Personal Guaranty?
A personal guaranty is a contractual obligation by an individual to be personally responsible for the debt or obligations of another party. In the context of a commercial lease, the tenant's guarantor agrees to pay the landlord if the tenant is unable to do so. The guarantor is essentially saying to the landlord, I will be the surety and you can “pierce the corporate veil” of the tenant to collect against me personally, including my house, car, personal bank account, and other assets personally held by me, if the tenant does not pay.
Here is some key information to know about Good Guy Guarantees:
Good Guy Guarantees are a creative type of possession limited guaranty; the guarantor is saying that if my business defaults and I cannot pay, I’ll hand you back the guys and relinquish possession, and that should be the cutoff date for how liable you can hold me - i.e. personally liable for everything before handing keys back, but not the whole balance of the term.
The Good Guy Guaranty has no bearing on the tenant's ability to break a lease prematurely; it only relieves good guy guarantors of personal responsibility if all of the stipulations are satisfied.
If a tenant is current on rent and leaves the property clean and in broom-sweep condition, the assets of a GGG guarantor should no longer be exposed.
Broom-sweep means that there is no damage to the property. If these conditions are not met, then the GGG may still be enforced by law. To avoid this problem, it is recommended that both landlords and tenants photograph and document the condition of the office space before finalizing any agreements.
The tenant's security deposit covering late rent is only possible if the Good Guy Guaranty clause permits it.
Any written agreements between landlord and tenant that are relevant to the GGG should be recorded.
The tenant is only responsible for the Good Guy Guaranty if they notify the landlord in writing and deliver the keys to either the landlord or agent.
In most situations, the Good Guy Guaranty will apply, and courts may hold the guarantors liable if a tenant accepts a space in the "as is" condition as specified in the lease but changes their mind as a result of events that are not covered by the lease.
GGG Summary:
The Guarantor will be released only if the tenant agrees to guarantee that he or she will not be in default in any of the lease terms, including rent and additional rent, before the vacate date.
If the tenant falls behind on their lease at any point in time or does not vacate and return the property to the landlord by the required date, Guarantor's liability will continue. The Guarantor will still be held accountable for making sure that the tenant fulfills all aspects of their lease.
The Good Guy Guaranty protects the guarantor from personal liability, not the tenant. The corporate tenant is still obligated to uphold their end of the lease, even if they are no longer creditworthy. Even so, the Good Guy Guaranty might be important to the transaction by relieving the Guarantor of personal liability, providing security for a set length of time, and, lastly, returning the leased property to the landlord in accordance with lease conditions. By using this method, the landlord saves time, money, and energy that would be necessary to take back possession of the property. By beginning the re-leasing process early, landlords increase their chances of finding a new tenant quickly.
Guidance from Counsel
Most personal guarantees last for the entire term of the lease, plus any renewal periods, and some even continue after the lease ends. For example, if the tenant defaults and the landlord has to evict the tenant and then relet the space, the guarantor may be responsible for the landlord's lost rent and other damages.
It is important to understand that a personal guarantee is a substantial responsibility. By signing a personal guaranty, you agree to put your personal assets at risk if the tenant defaults. This includes not only your primary residence but also your savings, investments, and even your retirement account. In some cases, the landlord may require a guarantor to post a security deposit or even sign over collateral, such as a vehicle, to secure the guaranty.
Before you agree to sign a personal guarantee, it's important to understand the extent of your obligations. You should consult with a Portland real estate attorney to make sure you understand the implications of signing a lease guaranty. An attorney can assist renters in negotiating advantageous leases with landlords while reducing any potential long-term difficulties. We also educate tenants about the consequences of various provisions in those contracts, such as the Good Guy Guaranty. We are here to help.