One of the things you will need to think about when moving offices is negotiating the commercial lease for the space you choose. Many landlords require that you secure your financial obligations and liabilities by signing a lease guarantee. This agreement provides assurance to the landlord that all payments due will be covered if you default.
Several types of guarantees can be used in commercial real estate transactions, including:
Personal Guarantee
Personal guarantees are commonly used in commercial real estate transactions involving small businesses and startups that have not yet established their financial history. With these guarantees, the business owner or another party personally assures the landlord that the rent will be paid if the tenant’s business fails to meet the terms of the lease. While these guarantees pose significant risks for tenants, these guarantees are useful to landlords by allowing them to pursue the guarantor’s personal assets in the event of a default.
Full or Absolute Guarantee
A full guarantee provides the most coverage for landlords. A full guarantee requires the guarantor to cover all the tenant’s obligations under the lease in the event of default. This can include both monetary and non-monetary obligations under the lease, such as:
- Rent
- Operating expenses
- Utility charges
- Insurance
- Repairs
- Licenses
- Permits
A full guarantee imposes no conditions upon the landlord before they may pursue the guarantor. the landlord can move swiftly to enforce a guarantee following a default.
Limited Guarantee
Limited guarantees place a limit on the guarantor’s financial liability. For example, the limited guaranteemight place a cap on the dollar amount that must be paid — or restrict liability to certain conditions. A limited guarantee may also require that a landlord exhaust their remedies against the tenant before they can enforce their rights under the agreement. These guarantees come with advantages for both the landlord and the guarantor. Although limited guarantee do not provide as much coverage for landlords, the limited guarantee still provide security while reducing the risk for guarantors.
Bad Acts Guarantee
A bad acts guarantee is a partial guarantee that only becomes enforceable after a triggering event such as fraud, misrepresentation, failure to maintain insurance, intentional property damage, or another action considered a “bad act.” Other triggering events can include the tenant’s bankruptcy, hazardous substance contamination, and misappropriation of funds. The agreement should clearly specify what is a bad act — and a tenant must carefully review this document to understand their risks.
Good Guy Guarantee
A good guy guarantee is a type of personal guarantee used in commercial office leases that both limits the tenant’s personal liability and gives the landlord a form of security. A good guy guarantee gives tenants an exit strategy if they need to end the lease early, while giving the landlord the assurance that the landlord will receive rent up to the time the space is surrendered — and the premises will be returned in good condition.
Joint and Several Guarantee
A joint and several guarantee involves multiple guarantors, each of whom agree to be held individually responsible for the lease obligation. This guarantee lets a landlord pursue the signers in the event of a default, giving them strong assurance they will recover their losses. However, since each guarantor is liable, these guarantees can lead to disputes among the guarantors if the duty must be enforced.
Contact an Experienced New York Business Attorney
If your business is growing and you’re considering a new office space, it’s essential to have a skilled attorney by your side who can negotiate the lease terms on your behalf. Offering careful representation and trusted counsel, Brinen & Associates works with clients on a wide range of business matters, including drafting, negotiating, and reviewing commercial leases. Call (212) 330-8151 or send us a message to learn more about how we can help you.
