Do you have questions about the Good Guy Clause? The GGC is an important part of Manhattan commercial lease negotiations.
Thomas Murtha, Partner at Capstone Realty, defines the GGC in informative detail and discusses how it can benefit both the tenant and the landlord.
What is the Good Guy Clause?
The purpose of the Good Guy Clause (GGC) is to help landlords avoid a lengthy and costly eviction process in the event that a tenant has ceased to pay rent, and to help tenants limit the amount of security deposit. The GGC is also known as “Good Guy Guarantee,” “Limited Personal Guarantee,” or simply “Guarantee.”
Although the language will vary from one GGC to another, the following requirements are typically found therein:
- Tenant must give notification to the landlord (notification period varies – typically three to six months)
- Tenant must deliver keys of the demised premises to the landlord or managing agent and surrender the demised premises to the landlord in broom clean condition and free of all subleases or licensees.
- Tenant must be up to date with all amounts due and payable under the lease as base rent or additional rent or other such charges.
THE SPIRIT OF THE GOOD GUY CLAUSE
The spirit of the Good Guy Clause is a Personal Guaranty from either the principal or officer of the corporate entity that signs the lease, thereby making him/her personally liable for the rent while the corporate entity occupies the space. In the event the tenant ceases to pay rent, for whatever reason, the tenant will be a “good guy” and will vacate the premises, effectively ending the personal liability.
The majority of landlords in Manhattan require a Good Guy Clause to be signed and will typically perform a credit check on the individual(s) that intends to sign the clause. The most important thing to do prior to signing the GGC is to make sure there is no “long tail” attached to it. Tenants must ensure that the Personal Guaranty terminates as soon as the demised premises are surrendered / returned to the landlord. Tenants also must be hyperaware of the notice period required to activate the rights of the GGC. For instance, some landlords will require that tenants give six months’ notice prior to exercising the Good Guy Clause. As a tenant, you ideally want to trim this notice period down to three months or less.
IN THE EVENT YOU DECIDE TO SELL YOUR BUSINESS
It is also important to ask for language to be inserted into the Good Guy Clause in the event you decide to sell your business. It seems the majority of business owners that I work with do not have an exit strategy in place with regards to the lease or an intention to sell their business any time soon, however, it is important to have the proper lease and GGC language in place in case the long term goals of the company change. Most landlords are fine with inserting language that states tenants have the right to transfer the Good Guy Clause to another individual of the same financial strength in the event the business is sold.
A majority of the office leases in Manhattan contain a Good Guy Clause.
WHEN THE GOOD GUY CLAUSE IS NOT SIGNED
In the instances where a Good Guy Clause is not signed:
- The principal of the corporate entity is not a U.S. citizen.
- The company is publically traded.
- The landlord does not require a GGC to be signed.
- The principal absolutely refused to sign the GGC, and in exchange, a higher security deposit is the result.
If you have questions about the GGC and the commercial real estate industry, then just ask us. Thomas Murtha will answer any questions that you may have. You can visit the GGC website and submit your inquiries.