Personal Liability in Regards to Commercial Leases

Is a business owner personally liable under commercial leases?

Like so much else in law, the answer is, "It depends"--it depends on:

• Is the business a corporation or limited liability company (LLC), or is it a sole proprietorship or partnership?
• If the business is a corporation or LLC, did the owner personally guarantee the company's obligations?

Limit Your Liability

Who or what rented the space? That's who is responsible. A corporation (whether C-corp or S-corp) or an LLC are separate legal entities, distinct from their owners. If a corporation or LLC leased space, then it's the corporation or LLC--not any owners or officers--which is responsible. If the corporation or LLC doesn't pay the rent, or perform some other obligation under the lease, the commercial landlord can't go after the owners, except to any extent they personally guaranteed the obligations. (See below.)

On the other hand, a sole proprietorship IS the owner--there's no separate legal entity. And a partnership is also the owners--again, there is distinct legal entity to take responsibility. (In a limited partnership, the limited partners have some insulation from liability--but not so the general partners who run the business.) If a sole proprietor or a partner signs a commercial lease, he or she is personally liable.

Guarantees Can Guarantee Personal Liability

Savy commercial landlords know that a corporation or LLC limits the personal exposure of the owners, which means that the landlord can only look to the business for payment of rent. With a new or small business, or one that has few assets, the owners can effectively walk away from the business if its obligations outweigh its income or its prospects, leaving the landlord without recourse.

There are two ways that landlords seek to protect themselves. The first is by requiring a large security deposit, which indemnifies them up to the limit of the deposit. (Note: a landlord can get a larger security deposit for a commercial lease than for a residential one.) The second way is by having one or more business owners personally guarantee the business's obligations, which means that if the business doesn't pay, the landlord can go after the owner.

How an Attorney Can Help

First, if you're starting a business, you usually should set up a corporation or LLC to protect personal assets. An attorney can advise you on the correct business structure and help create it.

Second, if there is ambiguity in how you signed your commercial lease--e.g. it's unclear whether you validly signed it as the president of your corporation or as yourself, personally--the landlord may be able to hold you personally liable. An attorney can make sure you sign the lease in the proper capacity, with the right documentation or back-up.