Owning a business doesn’t make you an expert in anything else. One of the most common issues that we see is business owners who are being personally sued after defaulting on a lease that they have personally guaranteed.
The main reason you create an LLC or incorporate is so that you are personally protected from all the debts and liabilities that a business incurs during its lifetime. This is commonly referred to as a corporate veil and it typically applies to all corporations and limited liability companies in Nevada. But this “veil” can be pierced. There are several factors that can allow a creditor to pierce the veil; including commingling of funds and not having an adequate operating agreement or bylaws. But the most common way to pierce this veil is when a business owner signs a personal guaranty. When you sign a personal guaranty you are promising the creditor that if the business fails to pay its debt you will be personally liable; even if your business closes.
The most common occurrence of this is when business owners sign a personal guaranty for a lease. We have seen many cases where the business owner personally guaranteed their lease agreement and when the business could no longer pay, the landlord filed litigation against the owner personally. The owners were personally sued for all outstanding amounts, including interest, late fees and attorney’s fees and costs.
Most states have laws in place to protect both the landlord and the tenant. Typically, these laws place limits on issues like premature lock-out and interruption of utilities. However, there are no laws that protect the business owner from being pursued personally if they have signed a personal guaranty. Even the most altruistic of landlords is going to make sure that their agreement is drafted to offer themselves the most protection possible in the event that you default on your agreement.
Your best bet is to hire legal counsel before you sign a lease but if you find yourself in this position or fear that you may soon default on your lease there are steps that can be taken to prevent or settle litigation. Many business owners are fearful that their only option is to file a bankruptcy; however, we see this as a last step. There are other options that can be pursued prior to filing bankruptcy. Most leases can be negotiated or “worked-out” by an experienced attorney. Typically in a lease work-out, the landlord agrees to accept a percentage of the funds owed in exchange for the tenant terminating the lease early. Often times if the business owner can prove that they do not have sufficient income or savings the landlord will accept monthly payments along with a promissory note. If this does not seem like a viable option you may be able to sublet or assign your lease to another business.
While they may be hostile or difficult to communicate with, the truth is that most landlords will want to resolve these issues. You can’t squeeze blood from a turnip and once they understand that holding you hostage in your lease or guaranty will provide them with no benefit they begin communicating. More often than not, once you retain an attorney the landlord will also retain an attorney and the debt is resolved quickly thereafter because experienced attorneys understand that negotiating a settlement benefits all parties. 98% of all lease disputes are resolved through a lease work-out.
Rena McDonald, Esq, has been negotiating on behalf of business owners for nearly 14 years and she understands that the best defense is a great offense. We urge you to never sign an agreement without first having it reviewed by an attorney. Having an experienced attorney review your lease agreement prior to signing can only increase the protection of your business and personal assets. Call us today to set up your free consultation at 702.448.4962.
