Many commercial landlords require that a guarantor secure the obligations and liabilities of a tenant as a prerequisite for entering into a lease, particularly if there is an issue with the tenant’s creditworthiness. The guarantor may be an individual or another corporate entity which promises to pay the landlord any and all payments due under the lease if the tenant defaults under its lease obligations.

To mitigate this risk, landlords should require either a personal or corporate guaranty to secure a tenant’s obligations under the lease.

Depending on the financial condition and bargaining position of the tenant and guarantor, the parties may agree to one of several types of lease guarantees, as outlined below:

• Full or Absolute Guaranty.  This guaranty provides the landlord the most comprehensive protection, as it requires the guarantor to cover all of the tenant’s obligations under the lease. This can include payment of all monetary obligations under the lease (i.e., payment of rent, tenant’s share of operating expenses and utility charges), as well as non-monetary obligations, such as repairs, licenses and permits. Another benefit for landlords is that a full guaranty does not impose any conditions upon the landlord before it may pursue the guarantor.
• Partial or Limited Guaranty. These guarantees provide more protections for tenants before the landlord can exercise its enforcement rights. A partial guaranty may be limited to just a tenant’s monetary obligations under the lease, and the guarantor’s liability may be capped at a specific dollar amount. A partial guaranty may also impose certain conditions on a landlord such as requiring the landlord to pursue or exhaust its remedies against the tenant before it can enforce its rights under the guaranty. In some situations, provided the tenant generally remains in compliance under the lease terms and conditions, the parties may agree that the guarantee will only apply to a set time period that is less than the full lease term.
• Bad Acts Guaranty, or sometimes called a Springing Guaranty. This is a form of partial guaranty that becomes enforceable only upon the occurrence of a specified event. The triggering event is typically an event of default by tenant under the lease, such as the tenant filing for bankruptcy protection. The triggering event may also be a result of the tenant’s or guarantor’s for “bad acts,” e.g. fraud, or substantial damage to the premises resulting from the tenant’s intentional acts or negligence.
• Good Guy Guaranty. This form of limited guaranty is the most favorable option for many tenants. Good Guy Guarantees require the tenant to provide the landlord reasonable advance notice of the intended surrender date, and the tenant must return the premises in good condition (reasonable wear and tear excepted).

Most limited guarantees are subject to the tenant not being in breach of any terms and conditions of the lease. Any limit on a guarantor’s liability may be subject to reimbursing the landlord for any brokerage commissions, the amortized cost of any improvements that were constructed for the tenant, and for all costs and expenses incurred by the landlord in enforcing and collecting under the lease and the guaranty.

For more information: Stewart Banner