Chefs and other restaurateurs face myriad legal issues when launching a new eatery. One of the most common legal issues that we see arises from the so-called "Good Guy Guaranty" leasing clause—a widely misunderstood agreement that can create a false sense of security about a restaurant owner's potential monetary exposure under their real estate lease. (Note: we use the common industry term 'good guy guaranty' clause in this alert while recognizing it is potentially outdated.) Below, we identify this trap and outline some steps that aspiring restaurateurs can take to avoid it.
"Location, Location, Location."
Like other business owners, most hospitality operators understand the old adage that the three keys to real estate are Location, Location and Location. Indeed, substantial market research goes into identifying the optimal place for a new restaurant. Once a general location is selected, brokers and local consultants will show operators a selection of "highly sought-after" spaces that, the operator is told, will be off the market soon. There is enormous pressure to decide quickly. The basic rental terms are stated in a term sheet or letter of intent (i.e. a summary specifying a few key terms, including monthly rent amounts and the dates of the term). In order to keep the upfront security deposit as low as possible, the landlord may request that the operator give a "Good Guy Guaranty"—a form of limited personal guaranty that allows the landlord to reach the guarantor's personal assets if the tenant fails to pay rent and doesn't give back the space. This guaranty often appears in a term sheet without any detail as to the guaranty terms. Operators are encouraged to review and sign the term sheet before the landlord will prepare the actual lease and guaranty. A few days later, the hospitality operator receives a lengthy lease and rider, and begins their review of the agreements.
How the Good Guy Guaranty Misleads Hospitality Operators.
At the back of the rider—after many pages of detailed rules and regulations related to paying rent, making alterations, venting the hood, obtaining insurance, and more—the operator discovers the Good Guy Guaranty. Despite its use of the word "good", operators and their advisors must analyze this clause carefully. It is not a "boilerplate" provision included in most standard lease forms; its specific terms often vary from landlord to landlord, with potentially significant negative impact.
While a Good Guy Guaranty is more limited than a full personal guaranty, it is poorly understood, and therefore can create a false sense of security for the hospitality operator. That's because brokers and landlords, at the term sheet stage, often describe it as a termination right—falsely assuring the operator that if the business fails, they can just give the keys back to the landlord and the lease will end. Here's a sample Good Guy provision:
"This Guaranty shall terminate and be of no further force and effect as to all matters accruing after the date Tenant vacates and surrenders the Premises to Landlord, provided that (a) Tenant shall give to Landlord not less than sixty (60) days' prior written notice of its intention to vacate the Premises on a date certain (the "Possession Date"), (b) that on or before the Possession Date, the Premises are surrendered pursuant to the terms of the Lease, (c) all unpaid Rent shall be paid up to and including the Possession Date..."
The "Good Guy Guaranty" Trap.
The big trap to avoid is the requirement that the surrender of the Premises must be "pursuant to the terms of the Lease." What does that mean?
New York courts have found that this requirement is not limited to the physical condition of the space (e.g. broom-clean, vacant, in good repair, etc.), but includes all other surrender requirements stated in the lease (e.g. obtaining landlord's written consent). Thus, returning the space without obtaining the landlord's written consent may not constitute a valid surrender of the premises and, therefore, the guarantor could be liable for the remainder of the rent through the end of the lease term. In effect, then, depending on how the Good Guy Guaranty clause is drafted, the landlord can retain a veto right over whether or not the tenant can actually surrender the space and exercise the provision. If the landlord doesn't provide "written consent", the guarantor can be stuck on the lease.
Another thing to notice about the sample provision above is: "This Guaranty shall terminate..." It doesn't say that the lease shall terminate; the lease continues, and the tenant is still responsible for all of the rents due under the lease until the end of the lease term. For instance, if the lease is for a 10-year term, and the restaurant fails after year 1, then the tenant remains liable for the remaining 9 years of the term. If the tenant complies with all of the "Good Guy" provisions, then the Good Guy Guarantor (but not the tenant) would be released from the remaining 9 years of the term.
Also note that the requirement for the tenant to send 60 days' prior written notice in the sample above is usually negotiable—the shorter the required notice period, the better for the guarantor because from the time that the tenant first sends the notice until the date that the tenant actually surrenders the premises, the guarantor remains liable for the rent. However, New York courts have held that the notice must be timely; if the appropriate amount of notice is not given, then the guarantor remains on the hook. Additionally, if the guaranty requires that the notice be given by FedEx or certified mail but the tenant only sends an email, then the notice is defective, and the guarantor remains on the hook.
Take Four Steps to Avoid The "Good Guy Guaranty" Trap.
Savvy hospitality operators can avoid the Good Guy Guaranty trap by taking these four steps.
- Ensure that the requirements for exercising the Good Guy Guaranty are written simply and concisely, and exercisable without any consent by the landlord. If you can't understand the steps for giving back the space and exercising the Good Guy Guaranty, then ask the landlord to rewrite them. A more operator-friendly guaranty clause may say: "Tenant may exercise the good guy surrender option by leaving the premises in vacant, broom-clean condition and delivering the keys to the Landlord's office. Prior to leaving the premises, Tenant or Guarantor shall give at least 60 days' prior written notice to the Landlord by USPS, UPS or Federal Express. Landlord's consent is not required for Tenant to exercise the good guy surrender option, notwithstanding any contradictory terms in the Lease or this guaranty."
- The surrender requirements in the guaranty should be the only requirements. There should not be any reference to other surrender conditions described in the lease. If there is a reference to any lease conditions, it is best to copy the exact conditions from the lease and paste them into the guaranty so the expectations are clearly stated.
- Your term sheet or letter of intent should state the required notice period and conditions to exercising the Good Guy Guaranty. It is better to negotiate those terms upfront before you spend a lot of time and legal fees reviewing the lease and rider.
- If you have to close your business and give back the premises before the end of the term, speak with your attorney beforehand, so that you can review all of the guaranty requirements and exercise the Good Guy Guaranty in the required manner.
Originally published February 23rd, 2024
This alert provides general coverage of its subject area. We provide it with the understanding that Frankfurt Kurnit Klein & Selz is not engaged herein in rendering legal advice, and shall not be liable for any damages resulting from any error, inaccuracy, or omission. Our attorneys practice law only in jurisdictions in which they are properly authorized to do so. We do not seek to represent clients in other jurisdictions.
