Wednesday, June 30th, 2010
Not surprisingly, I get calls from small business owners who are contemplating personal bankruptcy when their businesses fail. There are many issues that arise in these types of cases but I would like to focus on one problem that, more than any other, can force the business owner into bankruptcy.
Generally when the owner of a small business leases retail space, the landlord will demand a personal guarantee. This means, of course, that in the event of a default, the business (which may be a corporation or LLC) faces liability and the business owner personally faces liability.
Given this reality, every small business owner should seek counsel to discussion asset protection options before starting his business, but that is a topic for another day.
If the business fails you might be surprised to learn that the landlord does not necessarily have to take any steps to "mitigate damages" by releasing the retail space. Instead, the landlord can demand payment for the full value of the lease from the business owner personally. If the business owner has a house with $100,000 of equity, that equity is therefore at risk, and given that Georgia's bankruptcy exemption statute is stingy ($10,000 for an individual or $20,000 for a married couple filing jointly), bankruptcy may not offer much protection.
I ran across two helpful resources that go into more detail about the landlord's obligations or lack thereof. The first is a blog post from Atlanta lawyer David Pardue in his Georgia Real Estate Litigation blog. In his post, David discusses a recent Georgia Court of Appeals case called Sirdah v. North Springs Assocs., LLLP, which was decided by the Court of Appeals in June, 2010. In the Sirdah case, the Court restated its previous holding that a landlord is under no duty to mitigate damages unless (1) the landlord accepts the tenant's surrender, or (2) the tenant successfully terminates the lease. In the Sirdah case, the tenant returned his keys to the landlord and argued that by accepting the keys, the landlord accepted the tenant's surrender. The Court said that accepting the keys did not constitute an acceptance of the surrender.
Another helpful resource is a more extensive article written by attorney Stephanie Everett of the Bloom Law Firm in Atlanta. In this paper, Stephanie examines the various scenarios that could arise when a tenant breaches a lease and the resulting consequences. Although Stephanie's article is written for the benefit of landlords, tenants will find the information very helpful as well.
As the law in this area could change, you should not rely on these resources in the absence of counsel. If you are a small business owner and you are coming to the realization that your business may not survive, you would be wise to consult with a lawyer to discuss your options both in business and in terms of bankruptcy. I have seen far too many business owners who simply left and discovered after the fact that their bankruptcy options were limited, or too painful.
Posted in 1, Business, David Pardue, General consumer bankruptcy info, Georgia Bankruptcy, Protected property issues, Sirdah v. North Springs Associates, a, accepted, accepts, and, appeals, assocs, breach of lease, breaches, called, case, consequences , damages, duty, faces, landlord, lease, lease , leases, liability, liability given, llc, mitigate, mitigation of damages, north, owner, personally, resulting, retail, retail lease and personal liability, sirdah, small, space, springs, successfully, tenant, terminates, the, v | Comments Off
Wednesday, February 10th, 2010
My office colleague, Susan Blum is in the process of filing a Chapter 7 bankruptcy for a young woman. Our client currently lives in a rented apartment, and her lease runs through July of this year. Our client would like to find a cheaper place to live, however, she is concerned that she may not be eligible to sign a new lease after filing for bankruptcy. Our client asked for our advice about what to do.
First, we advised out client that her bankruptcy filing would not prevent her from finding a new apartment later this year and signing a lease. However, the the months immediately following a bankruptcy are a time when a debtor's credit is most damaged – it is very possible that our client would have a difficult time finding a landlord who would lease her an apartment right after the bankruptcy.
A better option in cases like this would be for our client to to sign a new lease prior to filing bankruptcy and reject the current lease in the bankruptcy filing.
Under the bankruptcy law a lease is considered an "executory contract," meaning that our client still has on-going obligations to perform under the contract. In this case, our client has the contractual obligation to pay her lease. Other examples of executory contracts are vehicle leases, health club memberships and cell phone contracts.
The bankruptcy law allows a debtor to "reject" or "assume" an executory contract. If the contract is assumed, the debtor remains obligated under the terms of the contract. If the contract is rejected, the debtor's obligations terminated.
In our client's case if she rejects her old apartment lease, the law deems the lease contract as breached as of the day before the bankruptcy filing. The landlord is entitled to repossess the apartment in accordance with state law. Any damages that the landlord might suffer are treated as pre-petition general unsecured claims. Per the Bankruptcy Code, the rejection damages that the landlord is entitled to are limited to either 15 percent of the balance of the rent that is left in the lease or the rent due for one year from the filing date or the date the apartment was surrendered, whichever is earlier. Fortunately the debtor can include any outstanding rent in her petition and wipe out the debt along with other unsecured debt.
Susan's client took our advice and has already signed a new lease on an apartment and she will be rejecting her current lease in the Chapter 7, including all future rent and penalties incurred for not fulfilling the lease’s terms.
Posted in Apartment, Bankruptcy, Current, Executory Contracts, Law, a, an, and, apartment leases, canceling leases, cell, club, contract, contracts the, deems, filing, health, lease, lease , memberships, phone, reject, rejecting, rejects, signing, susan blum, the, year | Comments Off
Not surprisingly, I get calls from small business owners who are contemplating personal bankruptcy when their businesses fail. There are many issues that arise in these types of cases but I would like to focus on one problem that, more than any other, can force the business owner into bankruptcy.