In my last article, I mentioned the closing was contingent on, among other things, getting Sellers released from their “good guy” guarantees.
What is a “good guy” guarantee?
While NYC commercial real estate attorneys are familiar with these personal guarantees, I’ve encountered clients running small, closely-held businesses who are unfamiliar with the meaning of this term, even if they’ve signed one.
A “good guy” guarantee, typically provides that a tenant failing to pay rent will be released from the remainder of the rental payments, if they give the landlord notice, vacate the space in good condition, and pay rent and all fees due until they leave. These guarantees can either be clauses contained within a lease or a stand-alone document.
I’ve always thought it was a bit of a misnomer, since they are limited personal guarantees, made by an officer of a business, guaranteeing the payment of rent by a defaulting tenant. They serve as additional security if the tenant is unable to pay rent. This is clearly a benefit to a landlord. So, isn’t the landlord actually the “good guy” for allowing a tenant to be released early from its rental obligations if they vacate the space and leave it in good condition?
Because the eviction process in NYC is costly and time-consuming, these guarantees are intended to incentivize bankrupt or otherwise defaulting tenants to vacate valuable commercial space. As such, it’s the officer agreeing to personally guarantee the rental obligations of the business acting as the “good guy” or “gal,” as the case may be. They are standard in Manhattan commercial real estate leasing as a compromise remedy, enabling landlords to quickly re-let the vacated premises. Nevertheless, in my experience representing corporate tenants, I’ve successfully negotiated them entirely out of, and/or negotiated fewer months of rent exposure, in certain commercial leasing transactions.
What happens when you need to replace a “good guy” guarantee in order to close an M&A deal?
As a condition to granting its consent to the change of control of my client’s business, the landlord in my recent transaction initially asked for an additional security deposit to be paid. But, after the requested amount was funded, the landlord’s consent was further delayed without explanation. Although the landlord wasn’t obligated to grant its consent, Buyer became exasperated that the closing would not occur until the landlord agreed to release my clients from their “good guy” guarantee.
As weeks passed with no indication of whether the landlord’s consent would be granted, I worried that the landlord wouldn’t deem the newly formed LLC Buyer, with no operating history, to be creditworthy.
The principal of Buyer was a heavily leveraged individual, who obtained SBA financing to fund the purchase price to buy my client’s stock. Even with a larger security deposit on hand, I wasn’t confident the landlord would agree that Buyer’s principal was sufficient to replace the two selling shareholders currently on the proverbial hook.
Alas, all’s well that ends well when the landlord consented, and the deal closed.
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