The "Good-Guy Guaranty"

A “good-guy guaranty” is common in New York City commercial leases, but it’s a mystery to many co-op and condo boards. It allows a failing business to vacate a commercial space before the lease is up – without being liable for the remaining period’s rent.

It sounds like it favors the failing business, but it was actually conceived by landlords since it helps avoid expensive litigation and a lengthy eviction process – during which time the landlord isn't receiving any rent. With a good-guy guaranty, cooperatives and condominiums with commercial space stand a reasonable chance of renting out the space to a paying business – while avoiding a fat legal bill. It's critical for boards to understand their commercial leases.

Which brings us to the curious case of Kenneth and Daisy Huang, who rented the commercial space in the 18-story co-op at the corner of East 69th Street and First Avenue, where they opened Splendid Cleaners. Things did not go splendidly, however, and halfway through the four-year lease, the Huangs wanted out of the lease – and more than $600,000 in forthcoming rent.

The co-op board pursued the owners for the business's remaining obligation. After Daisy Huang filed for bankruptcy, her husband argued in court that the sublease contained a good-guy guaranty. He couldn't point to any specific language, but he relied on the fact that if a contract contains ambiguities, then New York State courts have to interpret it in favor of the non-drafting party.

But the sublease had no ambiguities. In fact, it stated that the Huangs’ rent obligation was "primary, absolute, and unconditional, and not subject to counterclaim, offset, deduction, credit or defense of any nature whatsoever." Not much ambiguity there.

Therefore, the judge ruled in October that this sublease had no good-guy guaranty. "What is more,” he wrote, “[it] expressly states the [tenant's] liability shall remain until the tenant vacates and fulfills its obligations under the sublease." The court found Huang personally liable for the $600,000 in unpaid rent.

Co-op and condo boards need to weigh the pros and cons of a good-guy guaranty with their attorney, then decide whether or not to include one in the commercial lease. Boards also need to be aware that any ambiguity in a commercial lease may lead a judge to interpret that a good-guy guaranty exists even if the board didn't intend for one to be there. Your board’s attorney is likely to be familiar with good-guy guaranties, but it's good to make sure, since a lawyer specializing in residential real estate might not necessarily be completely versed in commercial leasing.

Double-checking that way – that's called being a smart guy.