Why It Pays To Be A “Good Guy” In Commercial Leases
In the world of commercial real estate, good guys don’t finish last. Good guys protect their personal finances and credit.
The good guy clause is very popular in areas like New York where the eviction process can be rather lengthy and it can take a year or more for a commercial landlord to get rid of a tenant. A good guy clause can help them move on from a default or bad tenant.
However, it also protects the tenant and keeps them from having to sign a full-blown personal guarantee when leasing a new commercial space.
Today, we will cover the basics, but if you want to learn more we invite you to read Lease Ref’s guide to the good guy clause for a deeper dive into how it works.
If you’re a new and up-and-coming entrepreneur, you might not have much credit history or much to convince a would-be landlord that you’re not going to default or disappear.
They may insist that you sign a personal guarantee as part of your lease, which makes you personally responsible in the remainder of the rent owed on the lease. And, if you’re a new entrepreneur, you may feel like you have to sign it. You do not!
This is not a red flag that you’re being scammed, but it’s also not something you have to agree to. There are ways to negotiate around this and the Good Guy clause is a solid compromise.
A personal guarantee could leave you personally on the hook for literally thousands of dollars if your business goes under for any number of reasons beyond your control. For example, if you’re a-one-person-show at work and you have to close up shop because of unforeseen health reasons, you could be left paying rent on a space you cannot afford.
Protect the Landlord’s Interest
The basis of the Good Guy agreement is that you’re going to remain very transparent if the business is in danger of going under. This way, the landlord is not blind-sided if you go under. They can make other arrangements.
This doesn’t offer the steadfast protection of a personal guarantee, but it does give the landlord:
- The money for an agreed-upon number of months, maybe 3-6 months
- The keys to the building, as you agree to vacate so they can get another tenant
This can be particularly beneficial to them if you’ve been paying a below-market price for the space. If this building or neighborhood has increased in value, they can get a new tenant in there and charge them more.
The good guy clause became really popular in the 90s, as countless landlords leased their spaces to promising dot-com businesses that were poised to make millions. However, the bubble burst and these landlords suddenly (and we mean suddenly) found their tenants going out of business. Many of them disappeared completely.
Since then, it has really gained popularity as a middle ground between a personal guarantee and no guarantee.
If you’re asked to sign a personal guarantee because you’re a new business, or your landlord has been burned before, you should try to show them you’re a good guy.