Expert: Phil Nicols - 12/13/2008

Question
If I have a commercial lease with an LLC entity in GA, and that "entity" stops paying rent or pays with bad checks, then I later discover that the entity is officially dissolved, is the lease contract still valid? What do I need to do under GA Law to move on and lease to someone else? Does this have to go before a judge?

Answer
Hi Mark

I'm based in Toronto Canada... Each US state has its own set of laws.

to complicate things more, I'm sure you will find that "law" is NEVER black & white! Its all GRAY at best.

a good lawyer can manipulate ANY story so its going to come down to who has the best lawyer. This is really a legal question first and a real estate question second.

Generally speaking, Ive had lots of tenants push the "Bankruptcy Button" on me and theres really nothing you can do.

ok let me re-phrase that -- it becomes a business decision on your part.

you need to assess:

1) is the tenant worth going after? --Do the officers of the company have any assets worth going after?*
2) whats it going to cost to litigate?
3) whats the best scenario? eg what can you get out of it IF you win?

-- see even IF you win, there is STILL the job of collection. the officers of the company can be held responsible (at least in Ontario) however, they can turn around and tell the court that they do not have the ability to repay you. Then the ball's back in your court to prove that!

It really sucks! Bankruptcy seems to override everything! Corporations use the "button" (as I call it) way too much. After Bankruptcy, creditors get a "pecking order" first in line is usually the TAX MAN for outstanding taxes, followed by secured creditors, then unsecured.

the only defence you have against this type of thing is PREVENTATIVE before it happens! This is why all the Major Malls now will NOT accept "mom & pop shops" -- certainly not numbered companies -- they want NATIONAL TENANTS with CORPORATE COVENANTS!

Thus, there has definitely been a paradigm shift in commercial leasing over the years. It's basically turned into the "haves" and the "Have Nots" -- Those with the best, A Class properties, like your major malls, get the best tenants with the best covenants and anything less, seems to be going for the lowest markets, eg D class properties with low rents and subsequently corresponding tenants.

I have owned "Dclass" properties (again, anything less than a major shopping mall) and found it just was a waste of time and money trying to chase anyone for rent. its time and money better used to try to find another tenant.

In fact, even if you went after the "tenant" (in your case a shell company with likely no assets), the court will still tell you that you need to "Mitigate your losses" - its your responsibility to attempt to re-lease the space!

in other words, if the tenant has lets say 2 years left to go, you need to be able to prove that you tried to re-lease the space to minimize the tenants exposure! its like YOU have to PAY for the fault of the tenant! I'm sure, in general terms, these rules will apply to your state as well.

So, in conclusion, not knowing the details of your lease;

1) I would bet that they didn't sign for more than 5 years in the first place.
2)If they made it for a year or two, I would assume there is only a max of say 3 years that you can go after max.

3rd, becuase of the situation, I can predict that we are not talking about an a class tenant in a major mall.

4th) because of your responsibility of "mitigation" even if you won, the court would likely not give you the full balance of the lease as a judgement. the court would likley say, that you could have re-leased the space, based on comparable etc.

So you need to ask yourself (like Clint Eastwood would say) "am I feeling lucky?"

Chances are, its not going to be worth chasing rainbows, spending money and more importantly, IRREPLACEABLE TIME.

If thats not enough to switch you from looking at litigation to more proactive solution, I can tell you that Ive personally been involved in court cases that anyone in their right mind would agree, was a black and white case (in my favour) but I leaned that this is not always the case. Its up to the judge, and in my case, they ruled in the defendants favour leaving me with the only option to appeal and spend more money and time -- at which point I said F' it! walked away from a $20,000.00 commission even though I knew I was right.

Life's too short! Avoid court at all costs!!

good luck

best, Phil