Attorneys & Lawyers & Counselors, Contractually Bound, Litigation of Business | Business of Litigation

I Personally Guarantee It!

1-satisfactionOver the past few months, I have had a few different cases where my client, an incorporated small business, either needed help with drafting (landlords) or negotiating (tenants)  a commercial lease agreement. In each case I try to impose, or conversely prohibit, a personal guarantee being a condition in the lease.   It is so standard to see a personal guarantee included in a lease that I am always amazed when it is absent. The exception, rather than the rule.

Most personal guarantees in commercial leases are the result of the landlord trying to minimize the inherent risks involved in renting property to a small business.  Since most small businesses have few, if any, liquid assets, the personal guarantee creates an extra level of protection for the landlord and helps assure that the lease will be fulfilled. Quite simply, the landlord is trying to make the agreement as secure as possible.

When a personal guarantee is agreed to it makes the individual signing the guarantee personally liable under the lease. This is prudent for a landlord just in case the tenant goes out of business, files for bankruptcy or otherwise can’t meet its financial obligations. ¬†It is also a slick way to sidestep the personal liability shield that would otherwise insulate the owners of an incorporated business from this liability.

A savvy tenant, with something ¬†to offer (even services or labor) can sometimes negotiate its way out of the requisite personal guarantee. But a sophisticated landlord will insist upon something else of value be put at stake instead. You can use UCC filings that cover a tenant’s business equipment, other assets, or even personal ¬†property, and designate the landlord as the secured party. It is also possible to successfully omit personal guarantees under the right conditions. These situations may exist where the rental property is unique, yet fit for a tenant’s particular use, when the tenant has previously honored a lease with the same landlord and, of course, when the landlord has no concerns about the tenant’s solvency.

After all is said and done, a personal guarantee won’t be worth more than the paper it is printed on unless the guarantor is financially viable. ¬†This brings me to the “moral of the story” got from¬†an article I read today. It demonstrated a perfect example of a landlord doing everything possible, albeit somewhat after the fact, to try to make sure he would be able to collect the losses allegedly suffered from a default in a commercial lease.¬†This applicable law in the case is technically distinct from a personal guarantee and is due to¬†the particularities of partnership law (and demonstrates a darn good reason to operate as a corporation or LLC rather than as a partnership).

So, yesterday, the Am Law Daily reported on a case where a landlord is currently suing 450 attorneys, who were formerly partners at a large Manhattan law firm. In the lawsuit, the landlord alleges all of the partners are personally liable for the default in a commercial lease involving six floors of a high-rise office tower.

The lease runs through 2020 and, at one point in time, the landlord believed the default resulted in a loss of more than $45.45 million. Although the landlord only claims about $1.6 million damages now, there is still a lesson to be learned. That lesson is that you can never go overboard when trying to tie people personally to a lease in order to secure it.

You can read more the whole article here:  http://www.americanlawyer.com/PubArticleALD.jsp?id=1202621080749&Deweys_New_York_Landlord_Sues_450_Former_Partners#ixzz2g9PTUBqJ

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Litigation of Business | Business of Litigation

Comparing Minnesota LLCs, Corporations and Partnerships

For anyone who has wondered about what some of the significant differences are between forming your business as a S corporation or C corporation, as an Limited Liability Company (LLC), and as a Limited Partnership, below is a handy-dandy chart explaining some of these differences. If you have more questions after reviewing this, make sure you contact a Minnesota Business Law Attorney (I come to mind). Enjoy!

Comparing Minnesota Business Entities

Characteristics

C Corporation

S corporation

LLC

Limited Partnership

Limited Liability

Yes

Yes

Yes

Limited Partner- Yes

General Partner-No

Continuity of Existence  i.e., perpetual existence

Yes

Yes

Varies

Varies

Maximum  Number of Owners Allowed

Unlimited

1-75

Unlimited

Unlimited

Variable Interests in Profits and Losses

No

No

Possible

Possible

 Single Owner Permitted

Yes

Yes

Yes

No

 Entity Taxable, i.e. No means pass through taxation allowed

Yes

No

No

No

 Classes of Ownership

Multiple classes permitted.

Only one class of stock permitted however, can be differences in voting rights.

Multiple classes permitted.

Multiple classes permitted

 Types of Owner(s)

Any

Ownership limited to U.S. citizens and residents and to certain U.S. trusts; no corporate (except S corp. which is 100% owner) or partnership shareholders.

Any

Any

Day to Day  Management Structure

Board of Directors (unless reserved to shareholders in Articles of Incorporation).

Board of Directors (unless reserved to shareholders in Articles of Incorporation).

Members or Managers

General Partner

Formality of Structure

Meetings of directors and shareholders, with minutes, required.

Meetings of directors and shareholders, with minutes, required.

Failure to hold meetings of members or managers  or to observe formalities regarding meetings may result in piercing of corporate veil

Per partnership agreement; limited partner engaging in management loses limited liability.

corp org

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