Entrepreneurs and owners of successful companies know that one of the most important decisions for which they are responsible is the determination of location. A firm’s location can make or break an operation.
Once a specific location has been identified, the firm will need to decide if the property should be purchased or leased. This decision, and the processes that follow, should be carefully overseen by a commercial lease attorney.
A poorly written or executed commercial leasing agreement can have a detrimental impact on an entity’s stability and long-term viability. A bad lease may also be more likely to result in costly litigation, which is what happened in the recent case of Pannell v. Shannon, reviewed by the Kentucky Supreme Court.
This case dealt with whether the owner of a limited liability company could be held personally liable for a commercial lease that she signed. The lease didn’t mention the company’s name, and in fact, the company at that time was dissolved, though it was later reinstated.
The court ultimately determined that the owner was not personally liable because she had clearly signed the document in her capacity as the company’s owner, and further, that state’s limited liability laws allow for retroactive effect of reinstatement for administratively dissolved companies. That means she enjoyed statutory immunity and was not personally liable for breach of the lease.
However, this decision was only reached after the case made it all the way to the state supreme court. There were issues with this lease from the very outset that, had they been addressed before the document was signed, could have helped all parties circumvent the major dispute that ensued.
According to court documents, the owner and sole member of an interior design limited liability corporation entered into a commercial lease for a space of nearly 3,650 feet. She signed the lease on behalf of the LLC.
The following year, the firm failed to file its annual report, as required by state law, and didn’t pay the $15 filing fee. As a result, the company was administratively dissolved by the state.
The following year, the company still technically dissolved, the parties negotiated a new lease, which resulted in the interior design owner contracting for half the space. The new agreement was signed by both the company owner and the owner of the property. However, the name of the firm was never mentioned.
Rather than drawing up an entirely separate agreement, both parties agreed to use a copy of the original lease and simply write new terms over some of the old ones. These included details such as the amount of rent, length of the lease term and size of the space. The changes were initialed. The two signed above their original signatures. At no point did the company owner indicated her title with the company.
The rent costs were effectively reduced, but the business owner couldn’t keep up. She fell behind on her payments, and the property owner sued her for breach of the lease agreement. The property owner sought to hold the company liable, as well as the owner in her personal capacity.
The landlord argued that the tenant was liable because she had no authority to enter into the lease for the LLC and further that the corporate veil for the LLC should be pierced because the company was the “alter ego” of the company owner.
Shortly after that filing, the company owner sought to reinstate the LLC. She was issued a new certificate of existence, and the certificate of dissolution was effectively cancelled.
From there, the company owner sought a summary judgment from the court on the basis that she was not personally liable for the lease because the tenancy was through her company. As a member of the LLC, she was shielded from liability.
The property owner countered that the company owner had personally executed the lease, which was evidenced by the fact that she signed the lease without any reference to her company.
The Kentucky Supreme Court in its review affirmed the decisions of both the circuit court and the appellate court. The dissolution, they determined, had no effect once the LLC was reinstated, and the company owner had signed the lease as a representative of the company – not in her individual capacity.
The Brown Law Firm, LLC, has offices in Belmont and Boston. For a free and confidential consultation, call 617-489-0817 or contact us online.
Pannell v. Shannon, March 20, 2014, Kentucky Supreme Court
More Blog Entries:
Boston Business Watch: Contractual Liability Exclusions in Corporate Contracts, March 25, 2014, Boston Business Lawyer Blog