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The Mistake of a Business Owner Regarding a Commercial Lease

Hypothetical #1: Sarah owns Sarah’s Fancy Cakes, LLC. She rents out retail space at a local mall. When it became clear to Sarah that she no longer could afford her space as consumer spending habits had changed, she decided it was time to terminate the commercial lease. However, she signed a five-year lease and she was only two years into the five-year lease. Sarah seeks the advice of a business attorney.

Sarah’s attorney points out that the commercial lease for Sarah’s Fancy Cakes, LLC is in Sarah’s personal name. Sarah explains to the attorney that she signed the lease prior to registering her business name with the Minnesota Secretary of State’s Office, but that she has operated her business out of that space for two years as Sarah’s Fancy Cakes, LLC. The attorney explains that unfortunately because the lease was in Sarah’s personal name, she is personally liable for the remainder of the lease.

It is important that all contracts, leases, etc. are in the name of the business entity. If they are in the owner’s personal name, that contract or lease is a personal debt.

Hypothetical #2: Mark owns Mark’s Floral Delights, Inc. He creates beautiful custom floral arrangements for businesses, including hotels, Fortune 500 companies and office complexes to display in their lobbies. He wants to expand his business space. The landlord agrees to a new lease for the expanded space (without increasing the rent due to the economy), but requires that Mark sign a personal guarantee. Mark happily does so. Six months later, Mark is unable to continue with his business and wants to get out of the lease. The landlord states it will terminate the lease, but that Mark is personally liable because he signed a personal guarantee on the lease.

Mark consults with a business attorney. To his horror, he is told by the attorney that the personal guarantee does mean he is personally on the hook for the business space. Since there are two years remaining on the lease, Mark will be personally liable for $340,000, which is a significant chunk of his investments and savings. Mark explores his options. The attorney tells him that under the terms of his lease one of his options is to sub-lease the space. While that will not void the personal guarantee because he is still responsible for the business lease, which he personally guaranteed, it will provide him with the funds to pay the monthly lease. Another option is for him to sell his business in a stock purchase agreement contingent on the landlord agreeing to the new owner signing a personal guarantee.

Spangler and de Stefano, PLLP assists business owners with most aspects related to their business, including leases, contracts, employment issues, corporate formation, dissolution, estate planning, business succession planning and elder law.

The material contained herein is for informational purposes only, and is not intended to create or constitute an attorney-client relationship between Spangler and de Stefano, PLLP and the reader. The information contained herein is not offered as legal advice and should not be construed as legal advice.