Commercial landlords often gamble on the business concept of a prospective tenant. Not every business seeking rental space has a track record of success. Someone with no real business history may want to sign a lease when they start a business.
Unfortunately, a significant portion of new businesses fail in the first few years, leaving entrepreneurs scrambling to shut down their companies and find a new stream of income. The landlords who took a chance on those entrepreneurs often worry about collecting the rent they deserve.
Most commercial leases last for multiple years, and landlords expect to receive the rent they deserve in full when a tenant breaks the lease by closing the company early. Is it possible to hold a business owner personally accountable for the rent owed by an organization when that company is dissolved or shut down?
Owners may sometimes be personally liable
The details of the situation will determine whether or not a landlord can take legal action against the entrepreneur whose business failed. Certain business types, like sole proprietorships, make holding them directly accountable relatively simple. Other times, the entrepreneur may have started a limited liability company (LLC) or possibly a corporation. The formal business entity they created provides a layer of protection from collection efforts.
However, first-time entrepreneurs frequently make mistakes and may even violate best practices regarding record keeping and company finances. It is sometimes possible to ask the courts to pierce the corporate veil and hold an entrepreneur or business owner directly responsible for the financial obligations of the company.
A history of commingling personal and business resources, a failure to maintain appropriate account records and a host of other financial oversights could provide the necessary legal justification to hold the business owner personally accountable for the rent owed on the commercial property. The discovery process during a civil lawsuit can give creditors, including landlords, access to records that could help them build their case against a tenant whose business failed.
It can be very challenging to obtain full payment for the commercial rent owed from a failed business. Yet, exploring every option with the assistance of an attorney can potentially help commercial landlords mitigate losses triggered by a tenant’s business failure.