Get Seven Protections if Tenant Insists on ‘Good Guy’ Clause

Some savvy tenants are now insisting that owners add a “good guy” clause to their leases. A good guy clause says that the lease will terminate if a tenant defaults, doesn't contest the default notice, and within a certain time gives up (that is, surrenders) the space in the condition required by the lease. The tenant will be responsible only for paying rent (and any other charges) it owes through the day it surrenders its space. In other words, if the tenant moves out of its space after a default, it's required to pay only the rent due through the surrender date, nothing more.

Tenants like good guy clauses because of this limit on their liability. To persuade you to add a good guy clause to its lease, a tenant may point out that the clause helps you get back your space while avoiding the expense and aggravation of an eviction proceeding. Although the tenant's point is valid, a good guy clause is still hard to stomach, says New Jersey attorney Marc L. Ripp.

Agreeing to a good guy clause means that you're also agreeing to give up valuable lease rights and remedies—such as the right to accelerate the tenant's rent or sue the tenant for damages to get reimbursed for your out-of-pocket costs in connection with the lease (such as broker's fees), says Ripp. Plus you're stuck with an empty space, which could be a nightmare to fill in a soft leasing market, he adds. Worse yet, a tenant could abuse a good guy clause by turning it into a backdoor termination right, Ripp notes. That is, the tenant could deliberately cause a lease default so that it can get out of the lease.

If a tenant insists on adding a good guy clause to your lease, and you decide to go along, don't agree to a boilerplate clause supplied by the tenant. Make sure that the good guy clause that you agree to includes seven protections so that the tenant can't use the clause too easily to terminate its lease, says Ripp. There's a Model Lease Clause on p. 3 that you can adapt and use in your lease that includes these protections.

Should You Reject or Accept Good Guy Clauses?

If a tenant asks that you add a good guy clause to its lease, try to say no, so you don't lose out on valuable rights and remedies against the tenant, says Ripp. He has found that many tenants will drop their request for a good guy clause after meeting strong resistance from an owner.

But there might be times when you feel compelled to accept the good guy clause, Ripp notes. For instance, a very desirable or strong tenant with a lot of negotiating power might refuse to sign the lease without the clause. Or a tenant may be willing to rent an undesirable space at your building—but only if it gets the good guy clause in its lease.

There also might be times when you're willing to accept the good guy clause without too much persuasion. For instance, you may not be risking much by agreeing to add a good guy clause to the lease of a short-term or temporary tenant or that of a tenant in an “as is” deal (in which you've got few or no out-of-pocket costs), Ripp notes.

INCLUDE SEVEN PROTECTIONS

If you agree to include a good guy clause in your lease, make sure that the clause, like our Model Lease Clause, includes the following seven protections:

* Tenant Must Move Out Soon After Getting Default Notice

Say that the tenant must move out of its space and return the keys within a brief, set time after it gets a default notice, says Ripp. (The date by which the tenant must move out and return the keys is called the “Surrender Date” in our Model Lease Clause) [Clause, par. a(i)]. You don't want the tenant dragging its feet in deciding when it should move out. You want a clean, swift break so that you can start looking for a replacement tenant as quickly as possible, he says.

* Tenant Must Pay by Certified Check by Surrender Date

Since the tenant has defaulted and will be gone soon, require that it pay its rent and other charges it owes you (called the “Surrender Payment” in our Model Lease Clause) by a certified check, says Ripp. This way, you're assured that you'll get paid. If you don't require a certified check and the tenant's uncertified check bounces, you'll have to hunt down the tenant for the payment, he warns.

Also require the tenant to give you this check on or before the surrender date, says Ripp. Again, you don't want to get stuck hunting down the tenant for payment after it moves out and the lease terminates [Clause, par. a(ii)].

* Tenant Must Pay Prorated Rent up to Surrender Date

If the tenant surrenders its space on a day that's not the last day of the month, require that the surrender payment include rent and other charges prorated up to and including that day, says Ripp [Clause, par. b]. Otherwise, the tenant might try to pay you rent and other charges only through the last full month it occupied the space, he warns. You would lose out on rent for the days it occupied the space in the partial month.

* You Keep Full Security Deposit

Get the right to keep the security deposit when the lease ends, says Ripp [Clause, par. c(ii)]. It's only fair for you to keep the full security deposit, Ripp points out. For example, you're losing out on the rent you would have gotten if the tenant hadn't terminated the lease, he notes. The tenant should give up its right to the security deposit as part of the incentive to make you agree to the good guy clause, he says.

And don't allow the tenant to reduce the amount of the security deposit by offsetting against it the rent and other charges that it owes you, advises Ripp [Clause, par. c(iii)]. You're giving up valuable lease rights and remedies and should get to keep the full security deposit without any offsets and with the tenant paying the rent and other charges it owes you separately, he says.

* Tenant Remains Liable for Obligations Arising Before Surrender Date

Make it clear that you're keeping the tenant on the hook for all of its obligations that survive the end of the lease (such as the responsibility to indemnify—that is, reimburse—you for third-party claims), says Ripp. Also make it clear that the tenant is on the hook for obligations that accrue on or before the date it surrenders the space, says Ripp [Clause, par. c(i)] Otherwise, the tenant may try to argue that the good guy clause cancels all of those obligations.

* Tenant Must Release You from All Liability

It's critical to require the tenant to release you from all claims relating to the space that arise up to and including the surrender date, says Ripp. Plus the tenant must release you from all of your obligations that were supposed to extend past the end of the lease (for example, your obligation to indemnify the tenant against third-party claims).

Without these protections, you would be giving up your right to sue the tenant for defaulting under the lease, but the tenant could still sue you for defaulting under the lease (for example, for not indemnifying it against a third-party claim). That wouldn't be fair. If you're agreeing to give up your remedies against the tenant, then the tenant must give up its remedies against you, Ripp says.

Also, have the tenant give up its right to make claims regarding the security deposit or its right to get back escalation overpayments, he adds [Clause, par. c(iv)]. The tenant should forfeit those payments in return for your agreeing to the good guy clause, Ripp notes.

* Clause Is Void if Tenant Fails to Move Out or Pay Surrender Payment

Make it clear that if the tenant doesn't surrender the space on time and give you a certified check for the surrender payment, the good guy clause automatically becomes void, says Ripp [Clause, par. d]. This way, if the tenant doesn't do what the good guy clause requires, you'll get back all of your rights and remedies against the tenant, he notes.

CLLI Source

Marc L. Ripp, Esq.: Counsel, The Gale Co., LLC, 100 Campus Dr., Ste. 200, Florham Park, NJ 07932; (973) 301-9500; mripp@thegale company.com.