(Elenathewise)

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Good Guy Guarantees are designed to ensure that defaulting commercial tenants leave the premises promptly, avoiding loss of rental income to landlords. The guarantee provides an incentive for the guarantor (usually one of the tenant’s principals) to make sure the tenant leaves promptly, because the guarantor remains on the hook for rent until the tenant vacates the premises. However, in Bri Jen Realty Corp. v. Altman, NYLJ 1/13/17, p. 26., col. 2, the Second Department construed a Good Guy Guarantee to hold a guarantor liable for rent for 11 months after tenant surrendered the premises. Bri Jen counsels caution in drafting future “Good Guy” Guarantees.

The ‘Bri Jen’ Case

Landlord and MK Warehouse, LLC, had entered into a 10-year commercial lease to begin on Feb. 1, 2010. The lease provided that the annual rent was due in advance, “adjusting on the anniversary date of the commencement of the lease.” A rider to the lease provided that the annual rent was due in advance, but provided that for the convenience of the tenant, it could make payments in monthly installments on the first day of each month.

Benson Altman executed a Good Guy Guarantee of MK’s obligations. Altman guaranteed “payment as and when due of the fixed annual rent,” but his liability was limited to “the performance of those obligations and the payment of such fixed annual rent … as accrue up to the [surrender] date.” Tenant took possession, and made rent payments to cover the period through March 1, 2011, but vacated and surrendered before that date. Landlord then brought this action against both tenant and guarantor to recover the unpaid annual rent for the period ending Jan. 31, 2012 — a period covering more than 11 months after the date tenant surrendered the premises to landlord. Supreme Court awarded summary judgment to landlord for $76,800 in unpaid rent, and also awarded $43,968.90 in attorney’s fees to landlord. Guarantor appealed.

The Second Department modified to vacate the award of attorney’s fees, but affirmed the award of unpaid rent. The court overturned the award of attorney’s fees because landlord’s submissions were wholly inadequate to support any fee award. On the more critical issue — the guarantor’s liability for rent — the court rejected guarantor’s argument that guarantor was liable only for the portion of rent attributable to the period before tenant surrendered the premises. The court focused on the lease provision declaring that the fixed annual rent was due at the beginning of each year-long period. Because the lease obligated guarantor to pay the fixed annual rent that had accrued by the surrender date, and the lease provided that the fixed annual rent accrued at the beginning of each year-long period, guarantor was liable for rent for the entire year beginning Feb. 1, 2011.

The Purpose of Good Guy Guarantees

Good Guy Guarantees are intended to protect landlords against defaulting and insolvent commercial tenants. Absent a guarantee, an insolvent tenant has little financial incentive to vacate the premises, and little incentive to maintain the premises in good condition before vacating. The Good Guy Guarantee alters incentives by obligating a (presumably solvent) individual to compensate landlord for any losses landlord might incur until the time tenant vacates. As a result, the guarantor, usually a principal in the corporate tenant, has a strong incentive to make sure tenant vacates promptly, allowing landlord to recover possession and relet the premises.

The Good Guy Guarantee is a limited personal guarantee. Unlike a full personal guarantee, the good guy guarantor’s obligation is satisfied when tenant has met all obligations accruing by the time tenant vacates the premises — even if tenant vacates long before the end of the lease term. Tenant may be liable for rent for the balance of the lease term; the good guy guarantor is not.

In Bri Jen, the court grappled with how to construe the Good Guy Guarantee when the lease stipulates that the rent is due annually rather than monthly. The court took a literal approach to the problem: The lease stipulates that “annual” rent is due in advance, and the guarantee obligates the guarantor to pay “such fixed annual rent … as accrue up to the [surrender] date.” On the court’s reasoning, because an annual period began before the tenant vacated, guarantor became liable for rent for the remainder of the year.

That literal reading, however, undermines the purpose of the Good Guy Guarantee, which is to incentivize the Guarantor to ensure that the defaulting tenant vacates promptly. If the Guarantor is liable for the remainder of the year whether or not the tenant leaves, the Guarantor has limited incentive to insure prompt surrender of the premises. As a result, landlord may not be able to relet the premises to a new tenant who might be able to use the premises and pay rent.

Moreover, the court’s construction of the Good Guy clause has the potential to allow the landlord to recover double rent for the same period of time. Suppose, as in Bri Jen, a tenant surrenders the premises long before the end of the annual period. The holding in Bri Jen makes the Guarantor liable for the remainder of the annual period. But, if the tenant has surrendered, nothing prevents the landlord from accepting tenant’s surrender and reletting the premises to a new tenant, collecting new rent for the same period for which the Guarantor is liable. Perhaps the Second Department would balk at that result, but the logic of the court’s opinion would permit double dipping by the landlord.

The Drafting Issue

The Bri Jen case suggests that lawyers for potential guarantors should take precautions before agreeing to a Good Guy Guarantee. In particular, if the lease purports to make annual rent due in advance, the Guarantor may want to limit the Guarantee to a prorated percentage of the rent for the year during which surrender occurs. Alternatively, the Guarantor may want to insist that the lease provide that rent for each month is due on the first day of that month, limiting guarantee liability to the last month of the tenant’s occupancy. In any event, the Bri Jen decision is must reading for any lawyer contemplating a Good Guy Guarantee.