A guaranty is an agreement under which an individual (or entity) agrees to satisfy the underlying obligations of a primary obligor if such obligor defaults on the underlying obligation. With respect to a lease guaranty, the guarantor is often the principal or owner playing a key role in the tenant entity or a parent/affiliate of the tenant.
There are several reasons why a lease guaranty may be mutually attractive to both the landlord and the tenant. First, while security deposits and letters of credit do provide some protection for the landlord, tenants are often reluctant to tie up large amounts of capital to cover lease obligations. Second, tenants often hold their leasehold interests in a single-purpose entity or some other entity that does not have substantial assets. Finally, the lease guaranty (i) provides additional comfort to the landlord that lease obligations can be satisfied, (ii) enables the landlord to pursue multiple parties for uncured defaults, and (iii) provides additional incentive to ensure the tenant’s performance under the lease.
Guaranties come in varying forms and are usually either absolute, unconditional guaranties or limited guaranties. An absolute, unconditional guaranty is the broadest form, in which the guarantor promises to pay or perform all obligations upon the primary obligor’s default without any contingencies. The scope of lease guaranties can be limited with respect to (i) payment or performance obligations only, (ii) duration and/or (iii) dollar amounts. For payment guaranties, the guarantor remains only liable for payments due under the lease and is not directly obligated to perform any acts that the tenant is required to do under the lease. For fixed-term guaranties, the guarantor’s liability ends on a specified date, so long as the tenant is not in default under the lease as of that date. For fixed-amount guaranties, the guarantor’s liability is capped at a specified dollar amount. With respect to rolling guaranties, the guarantor’s liability is reduced over a period of time, if the tenant is not in default under the lease. Lastly, “good guy” guaranties enable the landlord to recover damages from the guarantor for tenant defaults until a date certain that the tenant delivers possession of the premises to the landlord.
Under some circumstances, the Landlord may be willing to limit the scope of the guaranty. Occasionally, if the landlord has little investment in the space prior to leasing to a particular tenant, the landlord may forego a guaranty altogether. Alternatively, a landlord may limit the guaranty in duration and/or amount to be commensurate with the capital investment made by the landlord in connection with preparing the space for a particular tenant’s occupancy and/or to cover the downtime while reletting the space, if there is an uncured default under the lease. Depending on the transaction, landlords and tenants may have the flexibility to craft a lease guaranty that strikes the right balance between protection and equity of both parties. Before drafting or signing any lease guaranty, it is important to confer with your attorney to ensure the scope of the provisions therein are appropriate for the particular transaction.