Dear Bankruptcy Adviser,
What can I do about a lease for my business, a limited liability LLC, or limited liability company, when the business is failing? Is the lease considered debt like any other loan obtained by the business, or can I be held personally liable? Obviously, if the business folds and the LLC vacates the office space, the owner is free to lease it to another party. Should we try to negotiate a settlement payment to nullify the lease?
I have written on this type of question before, but there is a specific nuance to your question that many people are facing today. The biggest issue you must understand is, even though you signed a lease for office space for your business, it is more likely than not -- probably close to 100 percent likely -- that you personally guaranteed the lease. You and your personal assets could be at risk if the business goes under.
Most businesses are not adequately capitalized at inception. Individuals starting small businesses have minimal initial financing at inception and need to borrow money. Because of this, most lenders, landlords and suppliers will require that you personally guarantee any business agreement for office space. This allows the creditor to pursue you in the event you fail to pay your business obligations. That means that your house, vehicles and personal assets are at risk if the business fails. You are wise to consider a settlement payment. The landlord runs a business and should understand that receiving something is better than nothing. You may need to provide a list of your personal assets prior to reaching a settlement. The landlord will want to know what you are worth in order to decide whether to accept less than the full amount owed.
You also are correct to state that when you do vacate the premises, the landlord is free to lease to another party. The landlord does have a duty to mitigate losses, meaning the landlord cannot simply sit out your contract lease term then sue you for the unpaid lease portion without making a good faith attempt to re-lease the property. You should have a defense in any lawsuit the landlord filed against you if the landlord made no effort to find a new tenant.
That being said, commercial property owners are having difficulty finding new tenants for office space. Many of my clients have stopped paying rent on their stores altogether and landlords are allowing the client to stay on the premises because having someone in the building is better than having a vacant office.
At the same time, you might be able to sublease your site location. Typically, the landlord will have to approve any new tenant and you will still remain liable in the event the new tenant does not pay. However, that is another option that may exist.
Understanding the current economic landscape will help you negotiate a settlement. Most landlords are hurting as they face a significant cash-flow crunch. The cost of suing you over a broken lease could be significant enough to start genuine settlement talks. You are dealing with a delicate dance between asking for too much of a deal versus ending this relationship amicably. Do your research of the commercial environment in your type of office space in the surrounding area before contacting your landlord with a settlement offer.
Read more Bankruptcy Adviser columns and more stories about debt management. To ask a question of the Bankruptcy Adviser, go to the "Ask the Experts" page, and select "Bankruptcy" as the topic.
Create a news alert for "bankruptcy"