If you’ve been exploring commercial real estate leases, you’ve likely come across the term “good guy guarantee” or “good guy clause” in your lease. But what is a good guy clause?
Designed to alleviate the hassle of tenants breaking commercial leases, which can lead to expensive legal battles, a good guy clause in lease agreements is designed to put the two parties at ease if a situation occurs.
Need more details? We’ve got you. Our team is breaking down what is a good guy clause in a commercial lease and how to understand this concept best when searching for new office space: single, small, or large one. Let’s get started!
What Is a Good Guy Guarantee?
The good guy clause is a legal guarantee that maintains that if a tenant is unable to pay their rent, they will give their landlord notice, typically within three months, and vacate the space. Additionally, as part of the clause, the tenant will pay all their owed fees up until the day they leave.
This condition is important for both tenant and landlord, ensuring that as long as the tenant leaves the space in a good state, the landlord won’t keep the tenant legally responsible for the rest of the lease payments once they depart. Additionally, a good guy guarantee is often an alternative to making tenants put down a security deposit or an additional month’s rent.
How Does the Good Guy Clause Work?
Ok, so we know what a good guy guarantee clause is, but how does it work exactly?
The exact terms of a good guy lease guarantee can vary from lease to lease, but it’s essentially a promise that a tenant will be released from their lease term obligations, giving them the security to break from a lease if need be.
In order for this to work, a tenant must:
- Provide a landlord with notice that they will breach their lease agreement.
- Vacate the space and leave it in good condition as they do so.
- Pay all rent that’s due up until the day they vacated.
While it may seem like this agreement is all to the advantage of the landlord, a good guy guarantee is beneficial to the tenant, too. This is because it helps the tenant avoid paying additional fees for breaking their lease, which is usually a common (and expensive) practice.
Not convinced? Let’s go through what happens when breaking a lease with a good guy clause versus one without.
Breaking a Lease that has a Good Guy Guarantee
Imagine your law company signs a 3-year lease that includes a good guy clause in the lease agreement. You stay in the space for 2 years, but due to booming business, your employee count has vastly expanded, leading you to decide to stop your lease 12 months in advance of your agreement.
But do you still owe the money for the last year of the lease? Thankfully, with a good guy lease guarantee, you don’t.
Instead of paying out the rest of the lease or sticking it out in the space, the clause asks that the tenant be the “good guy” and let the landlord know they will be leaving and no longer making payments for the remainder of the lease. But that’s not all. You must also clean the space and ensure it’s in tip-top shape and free of damages, leaving it in as good of condition as you found it.
With a good guy lease, landlords are giving tenants the financial security to not pay out the rest of the lease, as long as they do their part and leave the premises in a timely fashion and in good condition. Really, it’s that easy. Well, that’s if you have the clause.
Breaking a Lease with No Good Guy Clause in Place
Time to consider the opposite scenario.
Imagine your company signed a 5-year lease for office space, but due to unexpected constraints, the business goes under after four and a half years. With no need for office space, and few funds left to even pay for it, you decide to break the lease.
Uh-oh, you don't have a good guy guarantee in your lease. What does this mean? There are a few ways this can go, including:
- You leave the space without any warning to the landlord, departing before the lease is up. This doesn’t give the landlord enough time to fill the space again, leading the landlord to take legal action against you due to your failure to pay out the rest of your lease.
- You refuse to leave the space, even though you can’t pay those last six months of your lease. Even with the landlord taking legal action, the process can sometimes last as long as a year, causing the landlord to lose a great deal of money as they pass each day without rent. This leads to a long, expensive legal battle that will further harm your financial state or make the landlord take an even larger hit.
Neither of these scenarios sounds great, right? When it comes to personal and financial security, the good guy clause ensures that you and the landlord are protected in the case you suddenly need to break a lease. It’s ultimately to the benefit of both parties and something you may wish you had in the long run.
How Can a Tenant Benefit from a Good Guy Clause?
There’s a common misconception that only the landlord can benefit from a good guy guarantee clause, but that’s not completely true.
While the good guy clause is in place to lower the risk to the landlord, it often makes them more willing to compromise on other areas. Most commonly, the landlord will reduce or completely remove the requirement for a security deposit, which can be a hefty price.
Additionally, if you leave a space with ample notice (3-6 months) and are in good condition, you’re no longer liable to pay out the rest of the lease. This can alleviate a major financial burden on your shoulders. However, keep in mind, if you do exercise the good guy clause, you do in turn forfeit your security deposit if there is one.
Difference Between a Good Guy Guarantee and a Personal Guarantee
A personal guarantee, unlike a good guy guarantee, or GGG, is subject to the length of the term. This means it is in effect for the full amount of time the lease is in place. However, with a GGG, the guarantee of payment only applies as long as a tenant is in the space.
What does this mean? Well, if you vacate a space before your lease is up with a personal guarantee, you will still owe rent for the duration of your original lease. On the other hand, with a good guy guarantee, your payments end once you depart.
When Is a Good Guy Guarantee Not Applicable?
While most commercial space leases offer a good guy clause, there are some situations where they are not needed, or simply aren’t possible.
There are a few reasons this may not be an option. One reason is that the guarantor of the good guy guarantee clause isn’t a U.S. citizen. With this agreement, the clause must be signed by a “principal of the tenant company,” and this person must be a U.S. citizen. Due to legal constraints, landlords won’t provide this guarantee to those without assets in the U.S.
Additionally, if the tenant is a publicly-traded company, there’s no one person to serve as the Good Guy Guarantor. In this situation, you will also be unable to garner a good guy guarantee.
To avoid personal liability as a tenant and protect landlords, a good guy guarantee can be a beneficial addition to an office lease agreement. It will not only help processes run smoothly in the long run in the case a lease must be broken but create trust between tenant and landlord that the situation will be handled with grace.
If you’re interested in a good guy clause in lease agreements or are ready to commit to new office space, we have just what you need at 620 N LaSalle. Contact us today if you are looking for office space to lease in Chicago.
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