For many years, a common form of guaranty of commercial leases in New York has been a limited guaranty colloquially referred to as a “good guy guaranty.” Under a full guaranty, the guarantor takes complete responsibility for the tenant’s obligations under the lease, so that if the tenant were to default, the guarantor is liable for, among other potential costs and damages, the entirety of the remaining rent due under lease. Under a “good guy guaranty,” however, the guarantor’s liability is limited, provided certain conditions are met. For example, a good guy guaranty might provide that if the tenant (i) provides advance notice of their intent to surrender the premises and (ii) surrenders the premises in the condition required under the lease with rent and other charges due under the guaranty paid through the date of surrender, the guarantor will not be liable for any costs or obligations after the surrender date. In this scenario the guarantor would only be liable for any guaranteed payments or obligations during the time the tenant occupied the premises, as opposed to the entire lease term. It is important to note that nothing in a good guy guaranty excuses the tenant entity from any obligations for the remainder of the lease.
Good guy guarantees can be a useful tool to protect the guarantor in the event of other economic hardship of a Tenant; however a case currently before the Court of Appeals, New York state’s highest court, brings into focus the wording of a good guy guaranty and may jeopardize guarantors who believed they were free of liability upon surrender of the premises.
122 East 42nd Street LLC v. Joseph Scharff
In 2007, 122 East 42nd Street LLC entered into a lease as landlord with Virgo Chanin Business Centers LLC as the tenant for a space on the 16th floor of the building at 122 East 42nd Street in Manhattan. The principals of Virgo, Joseph Scharff and Sarah Gotlib, executed an alleged good guy guaranty of the tenant’s obligations under the lease. The guaranty, among other things, included a limitation of the guarantor’s obligations until the time in which landlord was in possession of the premises and made express reference to the lease, as many guarantees do. Critically, the lease, a Real Estate Board of New York form, contained an often overlooked term that surrender of the premises would only be valid if accepted in writing by the landlord.
During the COVID-19 pandemic, Virgo suffered economic hardship and vacated the space in January 2021, prior to the end of the lease term. The principals thought they had exercised their good guy guaranty but did not obtain the written consent of the landlord to surrender, per the terms of the lease. The landlord filed suit against the guarantors seeking $1,273,299.36 in rent, fees, and interest, claiming that the surrender did not release the guarantors from their obligations because it was invalid under the terms of the lease. The court entered a judgement in favor the landlord, finding that irrespective of the guaranty’s good guy provisions, which would extinguish the guarantor’s obligations upon the tenant’s surrender of the premises, the tenant was obligated under the lease to obtain the landlord’s written consent in order for the surrender to be valid, which did not occur.
The defendant guarantors filed an appeal in December 2021, and the appellate court confirmed the ruling of the motion court, explaining that agreements executed at substantially the same time and related to the same subject matter, such as a lease and guaranty, are regarded as contemporaneous writings and must be read together as one.
The ultimate outcome will be decided by the New York Court of Appeals in the coming months; and commercial tenants and the real estate law community across New York will eagerly await their decision.
Regardless of the outcome, this case is a reminder of the importance of careful drafting and negotiation of a commercial lease, considering how various terms may impact each other.
The foregoing is not intended to be comprehensive nor constitute legal advice. If you would like to discuss your specific circumstances or would like more information, feel free to contact us at (212) 625-8505.