Guaranties in commercial leases

Most commercial landlords are aware of the importance of requiring a tenant to provide a solvent individual to guaranty the terms of the lease in the event of a tenant default. The guaranty provides the landlord with an alternative means of recovery against a defaulting commercial tenant, as it enables the landlord to seek recovery not only against the tenant, but against the guarantor as well. Since most commercial tenants are corporate entities and may only have limited assets, it is critical that the landlord has the ability to seek damages from a principal or investor in the tenant's business with tangible financial resources. The typical commercial lease guaranty, which can be incorporated within the lease or drafted as a separate document, is a mechanism by which the landlord can obligate the guarantor to be legally responsible for the full performance and observance of the tenant's obligations to the landlord. Since a commercial landlord in New York generally has no obligation to mitigate its damages in the event of a tenant default, a guarantor could potentially be responsible for all unpaid rent that accrues through the expiration of the lease or the date of re-letting of the premises. Often, a guarantor will request that it sign a "good guy" guaranty. The "good guy" guaranty benefits the guarantor to the extent that it limits his/her liability to the landlord to past due rent arrears only. A typical "good guy" guaranty requires a creditworthy affiliate of the tenant to guarantee the tenant's rent obligations under the lease through the date the tenant surrenders the leased premises to the landlord. Generally, the obligations of the "good guy" will cease only when the tenant: (i) vacates and surrenders the premises to the landlord in "broom clean" condition; (ii) delivers all keys, alarms and access codes to the premises to the landlord; (iii) delivers to the landlord a letter stating that the tenant has vacated and surrendered the premises free and clear of all tenancies and any claims of right therein; and (iv) tenders the full payment of all rent and additional rent due as of the date of the surrender. More often than not in the case of a defaulting tenant, the guarantor will not step up to the plate with respect to its contractual obligations under the guaranty. When the landlord decides to enforce its rights under the guaranty, it can commence an action against the guarantor in the appropriate court. Assuming that the landlord has a well-drafted guaranty, it can make a motion for summary judgment in lieu of a complaint based upon the guaranty. In layman's terms, this means that the landlord can seek to short-circuit the often cumbersome stages of litigation and seek the immediate entry of a judgment against the guarantor based upon the guaranty. On a motion for summary judgment to enforce a written guaranty, the landlord must be able to prove an absolute and unconditional guaranty, the underlying debt, and the guarantor's failure to perform under the guaranty. If the guaranty is not clearly drafted, the landlord will be unable to prevail on summary judgment and may subsequently find itself mired in a protracted litigation. Accordingly, the importance of a well-drafted guaranty cannot be disregarded by landlords in today's real estate market, where many commercial tenants are having a hard time fulfilling their rent obligations and litigation is all too common. The time spent by a landlord in drafting an ironclad guaranty will certainly prove of value should the landlord be required to enforce the guaranty at a later date. Andrea Lawrence is a senior counsel in the corporate services practice at Epstein Becker Green, New York, N.Y.