Any smart landlord will do whatever he/she can to insure that they won't be left "high and dry" by a tenant that doesn't pay their rent. The most common means of protection is through the use of a Security Deposit or Letter of Credit. The amount of this Security Deposit or Letter of Credit is inversely correlated with the credit worthiness of a tenant. To keep it simple, the worse the credit, the more security needed. Of course, certain companies with lots of money and a good track record may still be considered risky. Perhaps the best example are hedge funds. Virtually all of the billions that many hedge funds have is "tied up." The money they invest is tied up in investments, and the management fees are generally funneled directly to the partners. So, even though most hedge funds can afford expensive space in the best areas, they'll have to put up a lot of security to get it.
Now, to the heart of this post. In addition to, or in lieu of a security deposit, many landlords will insist on a "Good Guy Guarantee." I have found that there is a lot of misinformation out there on exactly what a "Good Guy Guarantee" is, so I'd like to set the record straight.
A "Good Guy Guarantee" is very simple. It says, that in the event that the tenant has to break the lease, the tenant will notify the landlord, pay their rent up until the date they vacate the space, vacate the space and return the keys. If, and only if the tenant does not abide by this guarantee, a principal of the tenant's organization will be held personally responsible. In this respect, the "Good Guy Guarantee" is a form of a limited personal guarantee. When the principal of a firm hears the words "personal guarantee," this often scares them off. The truth is, that once you realize what this guarantee is all about, it's not something to be afraid of. Truth be told, a "good guy" would not allow their company to stay in a space and not pay the rent.
I generally advise my tenants to sign a "Good Guy" (after using it as a bargaining chip of-course)and here's why. The Landlord's goal is simply to protect his or herself whenever possible. Using a "Good Guy" is a great way to prove to the landlord that you're worth the risk while reducing the amount of security that your company will have to provide. However, it's important to remember that corporate executives come and go, so your company should retain the right to substitute the guarantor at any time.
Monday, May 12, 2008
The "Good Guy Guarantee" and Why It's Not so Bad
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4 comments:
I always figured the "good guy clause" was meant to protect the buyer from being held liable from unpaid money from a broken lease.
This definition: http://www.bankapedia.com/mortgage-encyclopedia/residential-mortgage-terms/179-good-guy-clause
refers to the landlord as the one being the "good guy"
In any case- I'll take your word for it, since you are out in the field all day, dealing with real life examples of this.
Also - why would a landlord agree to a good guy clause in a depreciating market. If a tenant breaks their lease, the tenant taking their place will most likely be paying a lower rate.
Good article btw
DC,
I can't say that I've ever heard of the term "good guy clause" being used in the way your link describes. I also don't know of a landlord that would want to sign a clause like that in a good market or bad market. What the link describes, is simply a clause that allows a tenant to walk out on their lease whenever they want.
What's the benefit to the landlord? If market rents are much higher than the tenant's rent, the landlord always has the option to let the tenant break the lease at that time, to make the tenant pay a penalty to break it, or to recapture the space on a potential sublet (assuming the landlord has the right of recapture).
Since the good guy clause I'm describing refers to a "limited personal guarantee," the landlord can still go after a tenant for breaking the lease, they simply can't go after the principals of the tenant company if the tenant vacates the space.
In no circumstances does the good guy clause take away protections from the landlord, it only adds protections.
I heard that in order to benefit from the Good Guy clause, the tenant is supposed to go out of business.
Is this true?
And what happens to the tenant's initial security deposit, usually 1st and last month?
Paul,
If a tenant stops paying rent but is still in business the following would likely happen:
1) The landlord assess a penalty on the rent due, and issues a bill to the tenant. If the tenant still doesn't pay . . .
2) The landlord begins to draw down the security deposit until the money is gone.
3) The landlord evicts the tenant.
At that point, if the tenant does not leave and is not paying rent, the landlord may go after the good guy guarantor personally. The landlord will probably simultaneously sue the tenant's corporate entity assuming they are still in business.
Of course, every good guy guarantee is slightly different.
Regarding security deposit, if the tenant goes bankrupt a security deposit will become part of the bankruptcy estate and will be harder for the landlord to draw on than a letter of credit. For this reason, we recommend that whenever possible, a landlord obtain a letter of credit rather than a cash security deposit.
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