When a full guaranty isn’t in the cards, commercial landlords may rely on a “Good Guy Guaranty” (GGG) to mitigate the risks of leasing to a financially unproven tenant. While making the guarantor liable for a tenant’s financial obligations under the lease, the GGG also gives the tenant a right to vacate early if it can longer pay rent. The guarantor is then discharged as long as the tenant acts like a “good guy” in leaving the premises. 

Although a GGG is better than no guaranty at all, it can be undone when a tenant enters into a sublease, assignment, loan agreement, or other arrangement that survives the early surrender and encumbers the property for the duration of the underlying lease term. Thus, for example, even if the tenant does everything necessary to fulfill the good guy conditions and thus discharge the guarantor, you won’t be able to re-let the space if the tenant has already subleased it to a third party. And with the guarantor off the hook, your recourse will be severely limited.  

The good news is that a New York City commercial leasing attorney suggests a strategy to mitigate that risk: Before letting the GGG guarantor off the hook, require the tenant to sign a document declaring that the space is or will be empty and unencumbered as of a certain date.   

How the GGG Works

A GGG is a promise by a third party with deep pockets, often the corporate or individual owner of the tenant, to accept personal liability for the tenant’s obligations under the lease. However, the GGG provides an escape mechanism allowing for tenants to get out of the lease early without exposing the guarantor to liability for its future lease obligations. While precise terms may vary, under a typical GGG, the guarantor remains on the hook for all rent and additional rent up until the date the tenant vacates the premises; but it’s released from the obligation to pay future rent under the guaranty as long as the tenant: 

• Provides the landlord advance notice (typically three to six months) of its intention to vacate early; 
• Actually vacates the space by the specified date; 
• Turns the key over to the landlord;
• Leaves the space in “broom clean,” (i.e., no furniture, no trash, and no damage) or otherwise stated acceptable condition; 
• Pays all rent due up to the date it vacates; and
• Is not otherwise in default of the lease on the date of vacating.  

The GGG releases only the guarantor. The tenant remains on the hook for any lease violations it commits, including failure to pay rent after vacating early. Of course, that recourse isn’t likely to be worth much given the tenant’s financial situation. 

The Value of Having a GGG

The real point of having a GGG is to guard against the danger of being saddled with a tenant with no money to pay rent and nothing to lose by breaking its lease. Such tenants are likely to either vacate early without notifying the landlord or stay in the space without paying rent. Restaurant and retail tenants are especially likely to stick around if they can still generate revenue on leased space after they stop paying rent, the NYC attorney warns. 

Having a GGG totally changes the dynamic. It enables the tenant to simply notify the landlord that it intends to vacate the space in, say, three months. And if the tenant does drag its feet, the GGG gives the guarantor incentive to exert its influence over the tenant to get it to leave and fulfill the conditions of the GGG as soon as possible. Either way, the landlord gets three months of rent, a jump on seeking a new tenant for the space, and the comfort of knowing that in three months, the tenant will be gone and the space broom clean and relatively ready to go for the next tenant.

The Risks of the GGG

At least that’s the theory. Unfortunately, things don’t always go as planned, cautions the NYC attorney. She cites three common scenarios in which landlords holding a GGG “get stuck in the lurch”:  

Risk 1. Tenant subleases or assigns. It won’t be so easy to recapture the space upon move-out if the tenant has previously subleased it or assigned the lease. Moreover, because the standard GGG covers only the time the tenant occupies the space, you also won’t be able to seek rent payments from the guarantor once the tenant leaves. Your sole recourse will then be against the sublessee, assignee, or original tenant that couldn’t afford to pay rent in the first place.  

Risk 2. Tenant’s lender has right to fixtures & improvements. Another danger is that the tenant will assign a right to the fixtures it uses in its business or the improvements it’s made to the space to secure a loan. In that case, the bank or other lender may have the right to enter the space to repossess those fixtures or improvements. 

Risk 3. Tenant’s move-out date is unclear. Not knowing exactly when the tenant has or is planning to move out may cost you the opportunity to start marketing the space and also embroil you in disputes with the guarantor over when its financial responsibilities under the GGG end. 

Use Surrender Declaration to Minimize GGG Risks

To manage these risks, insert language in the GGG that requires the tenant to sign what’s known as a “surrender declaration” before the guarantor is discharged. The surrender declaration tells the landlord that the tenant is out of the space as of a certain date and that the space is unoccupied and available for rental. This helps you in four ways, according to the NYC attorney: 

• It keeps the guarantor on the hook for all lease obligations in case a third party has a right to the space via a sublease, lease assignment, or collateral assignment; 
• It enables you to determine the date that you can retake possession of the space;
• It gives you the tenant’s assurance that no one else has a right to the fixtures and improvements; and
• It assures the prospective new tenant that the space is available for rent, which may be important if the tenant had the lease or a “memorandum of lease” showing its right to the space put on public record.

How to Create Surrender Declaration

Executing this strategy requires a two-step drafting process. First, create a standalone surrender declaration for the tenant to sign that, like the Model Surrender Declaration, includes the following elements: 

1. Tenant’s surrender of rights to space. Make the tenant agree to give up any rights it has to the leased space, including fixtures, additions, alterations, installations, and improvements as of a specified date (called the “Surrender Date”). This ensures that you’ll know exactly when it will be safe to re-let the space. The guarantor will likely push for the earliest possible surrender date since that will be the date that its own financial obligations under the GGG will stop accruing [Declaration, par. 1]. 

2. Tenant’s representations on lack of third-party rights. Get the tenant to represent and warrant that it’s done nothing to give anyone else any rights to the space. That assures that there’s no sublet or assignment to prevent you from re-renting the space. And if anyone else does have a right to the space, the guarantor will remain on the hook, even if the tenant moves out [Declaration, par. 2].  

3. Tenant’s representations on lack of brokerage. There should also be a representation and warranty with regard to real estate agent and brokerage arrangements providing you comfort against potential claims for commissions for the space [Declaration, par. 3].  

4. Tenant’s continuing liability. While the surrender declaration discharges the guarantor, the tenant continues to be responsible for its obligations under the lease. The surrender declaration should include language that expressly affirms the tenant’s continuing liability [Declaration, par. 4]. 

How to Incorporate Surrender Declaration into Guaranty

You also need to add language about the surrender declaration to the actual GGG agreement that the guarantor signs. Like the Model Clause below, the GGG provision should state that after you get a signed surrender declaration and all keys to the space, the guarantor will be released from liability for any tenant obligations that arise after the surrender date. 

Also affirm that the guarantor continues to be liable for any unpaid rent or other tenant financial obligations that arose before the surrender date. The GGG clause should also make the guarantor responsible for any liability that arises due to the tenant’s breach of the representations and warranties contained in the Surrender Declaration in case the tenant isn’t truthful [Model Clause].