Good guy clause or personal guarantee? Both are important tools for property owners/landlords

A Personal Guarantee (PG), when drafted properly is a guarantee usually signed by an individual or individuals on behalf of their corporation or LLC guaranteeing that they, the individual(s), will be responsible for any terms or conditions of the lease not ultimately performed by the tenant of record. It is essential that, under any circumstances, the owner run an authorized background check on the proposed guarantor before entering into the lease. The guarantee is only as good as the ability of the guarantor to carry out the obligations of the corporate tenant, usually and most importantly the payment of rent or additional rent or pass alongs. Many improperly drafted PGs fail to take into consideration the actions of the guarantor after they sign the guarantee and owners find that, when they try to enforce the guarantee, the guarantor is now judgment proof. Hence, the language used in any guarantee is quite important. The person who executes a PG is on the hook for the tenant until the lease expires by its term. A Good Guy Clause (GGC) is a limited guarantee. When properly drafted, the person executing the GGC agrees to be responsible for the terms and conditions and rent of the corporate tenant up until the tenant surrenders possession and keys to the premises. It affords the corporate tenant a way in which to terminate the existing lease early that protects the guarantor in a more limited way and limits the guarantor's obligations to the owner only up until the time of surrender provided that, at surrender, the tenant is up to date on its obligations and rental payments and the like to the owner. The difference is that, if the tenant is current, a GGC permits the corporate tenant to vacate early (how early is subject to negotiations) without the guarantor having to pay for rent or pass alongs or do other things after the property is surrendered. With the PG, the guarantor's obligation runs to the conclusion of the lease. I try to get the GGC to remain effective until at least the end of the third year of the lease. Given the many concessions owners are giving today, that affords the owner a reasonable amount of time in which to recoup its concessions. When it kicks in is, of course, entirely up to your specific negotiations. In the hot real estate market of but a few years ago, when tenants were lined up around the corner to rent your store, owners were easily able to demand and get personal guarantees. In the event of a default by the tenant or an early surrender of the lease and premises, the guarantor was bound to pay the unpaid rent and expenses to the owner until the lease expired. If a tenant refused to sign the PG, it was easy for an owner to find a replacement willing to do so, many times the same day. Since the market softened, tenants have been refusing to sign personal guarantees and have preferred to sign only GGCs. Each owner must make that decision based upon their own business sense and peculiar circumstances of their property and their own needs. Each state has their own laws concerning the duty to mitigate damages when a tenant vacates. I have been observing more states leaning towards requiring owners to mitigate their damages and try to re-rent the property when the tenant vacates early. From a business sense, why would an owner leave a store vacant or miss out on an opportunity to collect some rent, while suing the old tenant and guarantor, as opposed to getting no rent at all? Finally, it is essential that the guarantees be drawn by a qualified attorney and that when or if the lease is being modified, extended or renewed, the language of the guarantee is reviewed to make sure that the guarantees are not lost due to an owner's lack of attention to detail at the time of the extension, modification or renewal. Howard Stern, Esq., is the owner and an attorney at Law Offices of Howard Stern, White Plains, N.Y.