It goes without saying that the landlord’s primary concern when entering into a lease is evaluating the creditworthiness of the tenant and protecting themselves in the event of a default. The most common means of protection used by landlords is getting an appropriate Security Deposit either deposited as Cash or a Letter of Credit. Due to bankruptcy laws which require a landlord to return a CASH deposit to the receiver assigned by the court many landlords insist on getting a Bank issued Letter of Credit which they are allowed to retain in the event of a bankruptcy. The amount of the Security Deposit is primarily based on the tenants financials (Typically the landlord will require to see the last two years tax returns and/or audited financial statements). It is pretty standard in NYC that a tenant with an established track record and good credit will end up with a 2-4 months security provided they agree to a Good Guy Guarantee. This varies from one Landlord to another and they will often ask for more for other reasons such as extensive tenant improvements and/or a company’s being based outside the US. When a larger security is requested it is usually possible to get it burned down (reduced over time) once a tenant establishes a timely record of payment and can demonstrate profitability.
In addition to a security deposit, most landlords in NYC will insist on a “Good Guy Guarantee. I like to call it a possession clause because in effect that is what it is. The reasons that landlords require a Good Guy Guarantee is to insure that in the event of a company is unable to pay the rent they surrender and vacate the space avoiding a lengthy and expensive eviction proceeding. I have found that many of my clients either are not familiar with a Good Guy Guarantee or have the wrong impression of what it is.
A “Good Guy Guarantee” is a limited personal guarantee that in its simplest form states that in the event a tenant is unable to pay the rent and need to break the lease they must notify the landlord, pay the rent up to 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, the principal who signed the Good Guy Guarantee will be held personally responsible. When the principal of a firm hears the words “personal guarantee,” this often sets off alarms. The truth is, that once you understand what a good guy guarantee is, it’s not something to necessarily be afraid of and in most cases it can not be avoided without posting a larger security.
A Good Guy Guarantee is not a get out of jail free card. The corporate liability per the lease remains and in the event a tenant exercises the Good Guy Guarantee but the corporation is still viable the landlord can still go after the entity that signed the lease for any remaining financial obligation.
I generally advise my tenants that it is ok to sign a “Good Guy” since most landlords require one and it limits the amount of security a landlord will require. In the event that there is not a person who has control such as a publicly traded company or foreign ownership the typical way to around a Good Guy Guarantee is to post a larger security. Like all legal documents it is important to consult with an experience real estate attorney when you get the document. The language of the Good Guy Guarantee varies and often has expanded language requiring notification periods and expanded financial obligations. These terms can be negotiated to protect the person who is signing it so it does not reach beyond the basic purpose. Also language can be incorporated to allow the person who signs it to be replaced in the event the officer who signs it is replaced after the lease is signed so you can substitute the guarantor.