You Know Nothing, Jon Snow (about Lease Guarantees)
Curiously, our newsletter receives by far the most fervent readership responses when we celebrate the start of another season of Game of Thrones, the HBO series based on the books of George R.R. Martin, depicting the struggle of seven families for control of the fictional kingdom of Westeros.
Perhaps it is a reflection of our subscribers’ intellectual heft or that we have our fingers on the pulse of high-brow culture.
Or maybe all that commercial leasing makes one want to unsheathe their broadsword and cause a little havoc.
Much talk since last season has been about the fate of Jon Snow, the heartthrob leader of the Nightswatch, protectors of the northern border of the kingdom, who is stabbed and left for dead in a mutiny.
A dour fellow this Jon Snow, always brooding about winter coming, battles with the dead, yada, yada, yada; hard to imagine all the fuss. Seth Myers hilariously imagines sourpuss Jon Snow attending a trendy NYC dinner party.
But fans of Westeros have been in an uproar over his fate and the internet is aflutter with hopeful rumored sightings of the actor, Kit Harington, on location for this season. Showing she for one has not lost perspective, actress Amanda Peet even threatened her husband screenwriter of the series with divorce if poor Jon is really gone.
In commercial leasing we have the opposite problem. A character that should be missing in action but is kept on too long; that is, a guarantor of a lease.
This can occur under a full guaranty of payment and performance or a “good guy” guaranty.
A guaranty of payment and performance covers all of the obligations under a lease, while a good guy guaranty (at least in theory) only covers obligations accruing through the date the tenant hands the keys back to the landlord.
In either event, circumstances may require that the guarantor be released from its obligations under the guaranty.
The guarantor may be selling his, her or its interest in the tenant entity. Or perhaps the guarantor is a partner in an accounting or law firm who intends to retire or switch firms.
Without a release from liability, the guarantor will remain responsible for the lease obligations of an entity or business which it no longer owns or in which it no longer plays an active part.
If you are a guarantor under a lease guaranty, be sure to address the following six issues in your guaranty in order to be released from your mutinous landlord:
- Allow for successor. Your guaranty should specifically allow substitution of a suitable replacement guarantor who will either assume all of your obligations under the existing guaranty or enter into a new guaranty.
- Release your liability. Your guaranty should be very clear that upon succession of the successor guarantor, you (or your estate, as applicable) shall be relieved of all then existing and future obligations (although some landlords may insist on limiting the release to future obligations).
- Cover entity change in control. Provide for a successor guarantor in the event of a “corporate transaction”. If you no longer control the tenant entity, you should not be responsible for the tenant entity’s performance under the lease.
○ A corporate transaction should be defined as broadly as possible as a merger, consolidation, sale of assets or beneficial interests, or any other change in control of beneficial ownership.
○ This scenario is similar to how a lease’s restrictions on assignment need to exclude corporate transactions.
- Cover individual changes in management. If you are an individual guarantor, you should have the right to appoint a successor guarantor if you no longer own or manage the tenant entity. The circumstances allowing for a successor guarantor should be defined broadly to cover if you retire or withdraw from the tenant, die, or no longer are actively engaged in management. In certain instances, e.g., if you are a partner in an accounting or law firm and a good guy guarantor, you may want to provide for no required substitute if the remaining partner-guarantors maintain control of the tenant entity.
- Address in the Guaranty. Many landlords will push you to address concerns regarding corporate transactions or changes in individual management outside of your guaranty. While correct that a company selling a subsidiary will generally be protected by an indemnity from the purchaser, it is certainly much cleaner if your company is not directly involved and any defaults are resolved between the landlord and the new tenant. For an individual, this is even more important so that you are not enforcing indemnities from former companies or partners, and particularly true in the case of a good guy guaranty where you were only on the guaranty because your (no longer existent) position in ownership or management allowed you to cause the entity to vacate the premises, thus allowing you to limit your liability under your guaranty.
- Define the successor guarantor.
○ Under a guaranty of payment and performance, the successor guarantor can be any entity or individual that, combined with the tenant, meets a reasonable net worth test. Remember, if your company or you individually have a high net worth, the successor should not necessarily have an equal or greater net worth, and a specified amount or multiple of rent should provide your landlord with comfort as to your successor’s financial viability. Your landlord will expect and be entitled to reasonable evidence of such net worth which can be quantified in the guaranty, but such evidence and documentation should be provided after the corporate transaction closes (you may be precluded beforehand by securities regulations or confidentiality agreements).
○ Regarding a good guy guaranty, even though many landlords insist otherwise, the net worth of the guarantor is not as relevant. What matters most is whether or not the successor is an owner or manager with sufficient control that it is completely within his or her power to cause the tenant to move and prevent further liability under the guaranty.
As that respected commercial leasing attorney Miracle Max once noted in the movie Princess Bride, there is a difference between “dead” and “mostly dead”. Luckily for Jon Snow, in Westeros this may also prove true. It would also not kill you to cover the six points above in your guaranty. Who knows, you might even feel resurrected.