NY Court Ruling Throws Wrench into Use of “Good Guy Guarantee”

Ramifications could extend beyond New York.



Ramifications could extend beyond New York.



Leasing to tenants that don’t have substantial financial assets is risky business. That’s because such tenants are more likely to experience difficulty paying their rent; and if their cupboards are bare, you won’t be able to recover damages if they do end up defaulting on the lease. Many commercial landlords rely on a special kind of limited guarantee known as the “Good Guy Guarantee” (GGG) to mitigate these risks. Under a GGG, a tenant that can no longer pay rent has the right to vacate early. Then, as long as certain conditions are met—that is, the tenant acts like a “good guy” in leaving the premises—the guarantor is released from personal liability. Regrettably, a recent court case threatens to undermine the use of GGGs, at least in New York.

How the GGG Works

As with any other guarantee, a GGG is a promise by a third party with deep pockets, often the corporate or individual owner of the tenant, to accept personal liability for the tenant’s obligations under the lease. However, the GGG provides an escape mechanism allowing for tenants to get out of the lease early without exposing the guarantor to liability for its future lease obligations. While precise terms may vary, under a typical GGG, the guarantor remains on the hook for all rent and additional rent up until the date the tenant vacates the premises, but it’s released from the obligation to pay future rent under the guarantee as long as the tenant:

  • Provides the landlord advance notice (typically three to six months) of its intention to vacate early;
  • Actually vacates the space by the date specified in the notice;
  • Turns the key over to the landlord;
  • Leaves the space in “broom clean,” (that is, no furniture, no trash, and no damage) or otherwise stated acceptable condition;
  • Pays all rent due up to the date it vacates; and
  • Is not otherwise in default of the lease on the date of vacating.  

The GGG releases only the guarantor. The tenant remains on the hook for any lease violations it commits, including failure to pay rent after vacating early.

Here’s a scenario to illustrate the advantages of including a GGG in a lease: A cryptocurrency speculation firm becomes insolvent with one year remaining on its five-year lease. Since it no longer needs office space and has no money to pay rent, it decides to break the lease. But having or not having a GGG in the lease may impact how it proceeds.

If there’s no GGG in the lease, the firm will probably do one of two things:

  1. Vacate without warning: The firm may leave the space early without notifying the landlord. And since it won’t have enough time to find a new tenant, the landlord may then sue the tenant for failure to pay the last year’s rent under the lease.
  2. Stay without paying rent: The firm’s other option is to stop paying rent while refusing to leave the space, thereby forcing the landlord to initiate eviction proceedings that may drag on for months. And since the landlord isn’t collecting rent on the premises, it loses money each day the dispute continues.

If the lease does contain a GGG, the firm can simply notify the landlord that it intends to vacate the space in three months. The landlord will then continue to receive rent for those three months. It will also get a jump on marketing and seeking a new tenant for the space. Three months later, the firm will vacate, leaving the space broom clean and relatively simple for the landlord to prepare for the next tenant.  

The Scharf Case

For all these reasons, the GGG has become a staple of commercial leasing in many states, including New York. At least that was the case before a recent ruling from a Manhattan trial court threatened to dramatically expand the scope of guarantor liability under a GGG.

The case began when a shared-office space company called Virgo Business Centers rented three floors of a Manhattan office building under a lease containing a GGG with Virgo’s CEO, Joseph Scharf, acting as the guarantor. Then came the pandemic. With so many people working from home, Virgo and others in the shared-office space industry suffered crippling losses. So, Virgo notified the landlord that it was vacating early. A subsequent email exchange confirmed that Virgo returned the keys and the landlord accepted them. Both sides wished each other luck. 

But there would be no happy ending. The landlord sued Scharf and another guarantor for three months’ of 2021 rent, over $669,000, plus interest and attorney fees. Even though all of the GGG conditions were met, the court granted summary judgment and over $1.1 million to the landlord.

Even more shocking than the decision was the court’s reasoning. The court cited a sentence buried in the boilerplate section of the lease stating that no surrender of the premises will be valid unless consented to by the landlord. The key to the ruling was the court’s determination that the GGG incorporated all terms of the underlying lease, including the requirement that the landlord consent to the surrender. Since the landlord in this case never gave its consent to the surrender, the guarantors weren’t released from liability under the GGG, the court concluded.

The guarantor appealed, but the New York appeals court upheld the lower court’s ruling [122 E. 42nd St. v. Scharf, 211 A.D.3d 517 (N.Y. App. Div. 2022) 182 N.Y.S.3d 607, 2022 N.Y. Slip Op. 7141 (Dec. 15, 2022)]. The case is now pending before the state’s highest court, the Court of Appeals. Meanwhile, the landlord has filed a second lawsuit seeking $3.3 million for 2022 rent. And with the lease running until 2032, the Scharf guarantors face total liability exposure of over $40 million.  

Impact of the Scharf Ruling  

Of course, the Scharf decision has major ramifications for other commercial landlords, tenants, and guarantors that rely on GGGs, especially but not exclusively in New York.

“The obvious intention of the GGG is to give the tenant the absolute right to vacate the premises without having to obtain the landlord’s permission and thereby release the guarantor from its obligations under the GGG,” explains a veteran New York City leasing attorney. Incorporating the entire lease into the guaranty—specifically, a boilerplate provision requiring the landlord to consent to the early surrender of the premises—takes away the “early escape” mechanism and thus undermines the purpose of the GGG. Applied broadly, the Scharf approach would effectively turn what the parties intend to be a limited guarantee into an unlimited full recourse guarantee.

Scharf also seems to go against years of precedent governing how GGGs are interpreted in New York, including a 2021 case finding that a guarantor’s obligations ended when the tenant vacated early, even though the landlord didn’t consent to the early surrender. “After the tenant leaves and the keys are returned, the tenant may still be on the hook, but not the guarantor,” the court reasoned [Daval 37 Associates LLC v. Alamoda Fascination, 2021 N.Y. Slip Op. 30159 (Jan. 15, 2021)].

3 Things GGG Guarantors Can Do to Protect Themselves

Unless and until it’s reversed on appeal, the Scharf case will continue to play havoc with commercial leasing in New York, particularly leases involving restaurants, bars, nightclubs, and other small businesses that rely on GGG guarantors to back them. But it’s also important to recognize that what happened to the guarantor in Scharf could happen to GGG guarantors in any part of the country. The moral for guarantors and tenants is not to incorporate all of the terms of the lease into the GGG agreement, whether by reference or otherwise. Potential solutions:

  • Specifically reference only those provisions of the lease that must be met for the guarantee to be effective;
  • Beware of any language that may be read as incorporating the entire lease by reference into the guarantee; and
  • Expressly state that the tenant’s compliance with the entire lease is not a condition of the guarantee.