Be Sure Limited Guaranty Covers Your Out-of-Pocket Leasing Costs

For landlords, the best guaranty is the one that covers the full amount of a tenant’s lease. However, the limited guaranty is often the only one available. A common form of limited guaranty is a provision that caps the guaranty amount of the landlord’s out-of-pocket lease costs. While this is typically just a fraction of the total amount of rent the tenant owes, it does cover your downside in the event the tenant defaults early in the lease term. At least it should. Here’s how a veteran New York City leasing attorney suggests you handle this kind of guaranty. 

4 Costs to Include in the Guaranty Cap

The cap is generally based on your out-of-pocket lease costs. And while the cap amount is likely to reflect the relative bargaining power of the parties, the New York attorney advises landlords to negotiate to include the following four items:

1. Brokerage commission. This is probably your most obvious lease expense. Landlords normally have to pay the full brokerage commission, even if the tenant stops paying rent and gets evicted or abandons the lease early in the term.

2. Costs of building out space. Landlords often pick up some or all of the costs of preparing the leased space for a new tenant’s use, either in the form of a work allowance or by doing the work itself at its own expense. In either case, the money you spend might go to waste if the tenant defaults early in the lease term. 

3. Rent concessions. Landlords who get victimized by an unanticipated early end to a lease often want compensation for the income they gave up in providing rent concessions to the new tenant. But tenants and their guarantors may counter that a rent concession isn’t really money that a landlord puts at risk and doesn’t count as an out-of-pocket expense. So, if your guaranty is limited to out-of-pocket costs, you probably won’t be getting that money back. 

4. Lease takeover costs. You might agree to take over the obligations of a new tenant who’s currently stuck in a lease with another landlord to free it up to move into your own property. An early default by the new tenant can cause these takeover costs to go totally down the drain. (See our February feature article for a full analysis of how to minimize the risks of a lease takeover.)

What the Limited Guaranty Should Say

Once both parties agree on a dollar figure amount, it’s easy to make the cap part of the guaranty. Inserting this language into the broader guaranty agreement should do the trick nicely, suggests the New York attorney:

MODEL LANGUAGE

The undersigned’s total monetary liability under this Guaranty shall be for an amount not to exceed [insert agreed-to dollar cap amount].

Expect Tenant to Demand Cap ‘Burn-Off’

If and when the new tenant actually settles into paying its rent and other monetary obligations under the lease, the landlord’s potential losses diminish. So, be prepared for the tenant or guarantor to ask for a “burn-off,” or decrease in the guaranty cap over time. Such a demand may or may not be acceptable. Just keep in mind that the guaranty amount should reflect not just the expenses you incur in entering into the lease but also fundamental factors bearing on the risks of the lease arrangement, including but not necessarily limited to: 

• The tenant’s net worth; 
• The nature of the business the tenant operates;
• The tenant’s business track record and future prospects; and
• The size of the tenant’s security deposit under the lease.