Guaranties

What tenants should watch for

Scope and form of the guaranty

Scope and cap. Negotiate dollar cap (typically twelve (12) months’ Rent for closely held tenants; greater for build-to-suit or anchor tenants). Limit to specific default categories (monetary defaults and material non-monetary defaults), not all obligations.

Dollar cap drafting traps. Landlord guaranty forms exclude from any dollar cap the costs of collection and attorneys’ fees, environmental liabilities, and losses arising from Tenant’s negligence or willful misconduct, exclusions that can swallow the cap. Landlord counsel also resist phrasing the cap as a guaranty of “payment of $[X] of rent,” which would permit the guarantor to argue that the Guaranty terminates once Tenant has paid that amount; guarantor’s counsel should press for precisely that reduction-by-payments structure or, at minimum, a true aggregate-liability cap with narrow, negotiated exclusions. Expect Landlord to condition each scheduled cap decrease on advance written demand and the absence of any prior Tenant or Guarantor default; the concession landlord counsel acknowledge as legitimate is limiting those conditions to material defaults.

Payment versus collection. Negotiate a guaranty of collection (obligating the guarantor only after Landlord exhausts its remedies against Tenant) rather than the landlord-form “absolute and unconditional guaranty of payment (and not of collection),” which permits Landlord to proceed against the guarantor directly without first suing Tenant. The substance of the instrument, not its label, controls; and Tenant’s rejection of the Lease in bankruptcy does not discharge the guarantor.

Good-guy guaranty surrender mechanics. Where the Guaranty is a limited “good guy” guaranty, draft the guarantor’s discharge to turn on Tenant’s surrender of the Premises, not on Landlord’s acceptance of the surrender; the New York Court of Appeals has refused to condition discharge on landlord conduct that the guarantor cannot control. Beware two landlord tactics: (i) incorporation of the entire Lease into the Guaranty, boilerplate providing that no surrender is valid without Landlord’s written consent can convert a limited good-guy guaranty into full-recourse exposure; and (ii) conditioning the guarantor’s discharge on Tenant’s delivery of a “surrender declaration” certifying that the Premises are vacant and unencumbered by any sublease, assignment, or lender’s rights in fixtures. If a surrender declaration is unavoidable, confine the certification to facts within Tenant’s knowledge and control.

Shrinking the guaranty over time

Burn-down. Negotiate a "burn-down" guaranty: dollar amount decreases over the Term. Common structures: 100% for first three (3) years, 75% for years 4–5, 50% for years 6–7, 0% (extinguishment) at year ten (10). The schedule depends on the deal and Tenant’s growth/credit trajectory.

Burn-down mechanics (drafting trap). Landlord burn-down forms condition each reduction of the cap on Guarantor’s advance written demand within a defined notice window and on the absence of any Tenant default (cured or not) before the reduction date, and provide that a reduction does not release liabilities already accrued. Negotiate automatic reductions that occur without notice or demand, and limit the default condition to uncured material monetary defaults.

Alternative release structures. In addition to a time-based burn-down, consider a net-worth-test release (the Guaranty terminates when Tenant demonstrates a defined net worth by audited financial statements), a per-default liability cap expressed as a fixed number of months of minimum and additional rent, or a fixed-duration guaranty that expires after a stated lease year.

Release events and mechanics

Release on assignment. Guarantor’s obligations should terminate (or substantially reduce) on assignment of the Lease to a creditworthy assignee (defined by reference to financial metrics: minimum net worth, EBITDA, public-company status). Resist guarantor surviving any assignment.

Release on change of control. If Tenant is acquired by an investment-grade buyer or completes an initial public offering, the guarantor should be released. The change-of-control trigger should parallel the Assignment & Subletting clause.

Written release instrument. On any release event (assignment, burn-off, net-worth test), require Landlord to deliver a separate written release of guaranty rather than relying on the operative lease or guaranty language alone.

Protections for an unreleased guarantor after assignment. If Guarantor is not released on assignment, require: (i) notice to Guarantor of any assignee default and an opportunity to cure, with the Guaranty terminating if Landlord fails to give the notice; (ii) a cap on Guarantor’s liability at what it would have been under the Lease as it existed at the assignment, so that post-assignment modifications do not expand Guarantor’s exposure; and (iii) the right to substitute a replacement guarantor meeting defined financial criteria, with the original guarantor released.

Defenses and enforcement

No waiver of surety defenses. Resist broad waivers of statutory defenses available to guarantors (e.g., suretyship defenses, statute of limitations, modification consent). At a minimum, preserve the defense that the underlying Lease has been materially modified without guarantor’s consent.

Jurisdiction and venue. Mutual jurisdiction provisions; consider Oregon for Oregon real-property leases. Avoid landlord-forum-selection clauses that put guarantor in a distant venue.