In the world of commercial real estate, landlords often require that a third party, known as a guarantor, secure the obligations and liabilities of a tenant prior to entering into a lease agreement. These prerequisite arrangements are formally known as lease guaranties, contractual agreements between an individual or an entity (the guarantor) and the landlord.
Normally, the guarantor is closely connected to the tenant, either as an individual with significant stake in the tenant’s business or as a related corporate entity. This contractual relationship ensures that the landlord will receive all payments due under the lease agreement, even in the event of the tenant’s inability or failure to meet the financial obligations.
As outlined in a recent article published by Holland & Knight LLP, there exist several different types of guarantees commonly used in commercial leases. These include:
- Absolute Guaranty: Under this agreement, the guarantor is obligated to fulfill the tenant’s responsibilities without the landlord having to first exhaust all remedies against the tenant. This is the most comprehensive type of guaranty and offers the greatest protection to the landlord.
- Conditional Guaranty: With this type, the guarantor’s obligations only become activated after the landlord has unsuccessfully attempted to collect the dues from the tenant. The landlord must exhaust all legal remedies against the tenant before turning to the guarantor.
- Good Guy Guaranty: This is unique to commercial leases and involves a limited guaranty that only holds while the tenant occupies the leased premises. If the tenant leaves the premises, even while still under lease, the guarantor’s obligations cease.
In practical terms, the type of guaranty chosen is largely determined by the level of financial risk a landlord is willing to accept, the tenant’s financial stability and business track record, and the negotiation power each party brings to the table.
The use of lease guaranties creates additional security for commercial landlords and can play a crucial role in facilitating smoother commercial lease agreements, benefiting both landlords and tenants alike.