Expert: Jim Avancena, CPM - 10/27/2010

Question
QUESTION: Hi Jim-
Thanks for the opportunity to tap into your expertise.
My brother and sister-in law may be asked to sign a commercial lease in a small 3 story building. This is a business(yoga studio) for my sister-in-law. My brother might have to be involved in order to add his income to qualify for the space.
My sister-in-law is already has an S-Corp for her own yoga activities.

How should this commercial lease be signed in order to protect my brother/sister-in-law while allowing both to qualify for the place? I assume that my brother can't sign as an "individual" along with my sister-in-law as a corporation.
Is there time for a LLP if that is needed?

Thanks Much!

Steve F.

ANSWER: Steve:

Allow me to beg the question.

Regardless of the business form that your brother and sister-in-law take signing the lease, I would be greatly surprised if the landlord does not arrange the lease terms in a way to enable it to recover for any financial exposure it absorbs by ratifying the lease.

If the landlord is going to spend any of it's own funds to prepare your premises for occupancy, or the lease gives your brother a few months of rental abatement after you move in, you should expect that the landlord's lease will require that a large security deposit be posted at the time the lease is signed that is large enough to cover, or nearly cover the value of the tenant improvement work and/or the few months of rental abatement if the yoga studio fails in the near future and the business stops operating.

The landlord might ask your brother and sister-in-law to agree to a "Personal Guarantee" for any debts incurred by the landlord under the terms of the lease.   If they are not seasoned retailers of a yoga studio, I would not agree to this.

Your brother may be able to limit his exposure by agreeing to the large security deposit, but providing that after 24 months or so, the amount of the security deposit be reduced to the equivalent of one months rent thereafter provided your brother has made his rental payments as stipulated in the lease.

The building you describe is modest size, so perhaps the landlord won't be as rigid as landlords' with many real estate holdings.  In this case, if the landlord/owner is reasonable with it's security deposit requirement or other demands, you may be lucky, and the landlord will accept the tenant signing the lease as an LLC, S Corp. etc.  

A landlord might allow your brother to sign the lease as an individual with a provision that he is signing for a "corporation to be formed" or other entity "to be formed" and at the time the other entity is arranged, his financial exposure would change to the limits of the new entity.   Your brother would need to be certain to form the new entity.

Your brother and sister-in-law must be circumspect regarding the risk they will absorb by signing a lease.   It is a commitment that has financially destroyed many well meaning, hard working people.  Also, be sure that EVERY STATEMENT your brother and wife are relying on that is spoken by the landlord be put into writing.  For example, if the landlord says that he doesn't believe that your brothers' monthly electricity bill will exceed $500 per month; have that limitation written into the lease document.  Also have a landlord/tenant attorney review the proposed lease document BEFORE your brother and wife sign the lease.   

Good luck,

- Jim

---------- FOLLOW-UP ----------

QUESTION: Jim
Thanks a ton for the prompt bit of advice. One follow-up if you don't mind.

Is it done where there are two signatures on the commercial lease-one individual and one SCorp? They are a married couple. Both are needed to qualify for the space. Or must they form a joint entity?

Thanks again Jim  

Answer
Steve:

I cannot verify what the law might be in your state regarding signatory to a lease, perhaps there is some provision that is unique to your area.  

Regardless of the entities signing, singly, jointly, as a corporation or otherwise; the landlord is likely going to trump any protections garnered by the business form of the entities signing the lease as the tenant by adding some form of security provision to the lease agreement that guarantees it access to certain funds - like the landlord holding a large security deposit - that the landlord can grab if the tenant ends up owing rent or other funds.

-Jim