Tenants: Beware continuing liability

Many times, I have been asked about continuing liability from small business owners who have previously sold their business. The answer does not bode well in many instances. lt is typical in nearly all lease agreements that the lease is to be personally guaranteed for the term of the lease. These personal guarantees are lengthy and contain some hazardous lease language to the would-be tenant who signs them.

In addition, when a lease is assigned by the business owner who is selling their business to a buyer, there is similar language in the lease assignment documents that appears to be very standard and benign, but there is no standard.

I was recently approached by a former business owner at one of my SCORE lectures who asked about his continuing liability after he sold his business. The answer is somewhat complicated as it depends on the language in the lease, the personal guarantee and lease assignment agreement.

In this case, the original lease for the business owner did not contain language, that if a lease was extended by the buyer (assignee) that the previous business owner (assignor) would still be responsible after the original lease term expired. There was no personal guarantee attached to the lease as the lease was in the business owner’s personal name, so this was good as there was no additional adverse language to be concerned with.

The problem came up when the business was sold and the lease required an extension, which is typical when selling a business if the seller wants to get paid consideration when he sells as there needs to be ample term left on the lease to make it worthwhile for the buyer to purchase.

The complication arose when the landlord drafted the lease assignment documentation which served to ratify the existing terms of the original lease – which a landlord has the right to do, especially if the tenant accepts the language.

In this case the language contained in the assignment extended the seller’s (assignor’s) obligation to be on the lease in perpetuity. The lease assignment document had specific language that allowed for unlimited liability relative to time that the assignor must be responsible for, as the language made multiple references that the lease may be extended by the landlord to the assignee for an unlimited amount of time keeping the assignor responsible until the time that the assignee decided to quit after the extended lease term expired.

Personal guarantees often contain similar language keeping the original business owner responsible beyond their respective lease terms. Since there are no standards in leasing commercial space, this can be negotiated before signing a lease or selling a business to a buyer.

In the case of this unsuspecting business owner, he should have looked over the assignment language before signing it and requested that at the end of the first extended term, he would be let out of his obligation. The landlord had to approve the new owner (assignee) and would not likely have approved them if they were not credit worthy or had the finances to fulfill the financial obligations of the lease.

This being the case, it may have been possible to remove this former business owner’s liability, but only at the time prior to the lease assignment documents being signed.

There is no assurance that a landlord would agree to this, but it is always worth asking for. lt is important to review what may seem to be a simple and brief agreement that could potentially tie up a business owner long. There are potential solutions if this situation occurs after the fact, such as providing some additional security deposit to the landlord in exchange for limiting the ongoing liability.

It is always best to have an independent unbiased professional specializing in the field of commercial real estate leases to assist in the review and modification of those documents before they are signed.