MEbiz Real Estate Insider – Protecting the Penny Wise in a Lease
Some penny wise clients resist advice to get real estate out of their own individual names, opening themselves to unnecessary risk. Fortunate clients, who have not met the “trial bar” up close and personal, sometimes still won’t make the change after receipt of appropriate advice. To be fair and respectful, some of these fortunate clients have collected a great many pennies over the years using a penny wise approach to business and are very successful doing it their way.
However, even for the client, declining good advice, relief can still be available in a lease. A typical limitation of liability clause in a lease states: “The tenant agrees to look solely to the landlord’s interest in the building for recovery of any judgment from landlord, it being understood and agreed that the landlord is not personally liable for any such judgment.”
This language needs an adjustment, if the property is owned individually, and clearly it isn’t providing protection against all claims. The tenant could argue that the clause is unfair in that the clause gives the tenant no remedy for its losses in the event the property is highly leveraged or there is no equity in the property.
For those landlords who hold property in their individual names, one can legitimately argue, that if he or she owned the property in a single purpose entity (LLC, LLP, Trust, etc.) the individuals who own the interests in a landlord entity, would be protected in the event of a loss. The landlord argues: why then should the individual landlord have less protection, if for historical, tax or other reasons the landlord chooses to own the property in his or her own name or in a general partnership rather than a single purpose entity.
It is important for landlords to hold firm on this issue. Landlords don’t want their personal assets subject to a claim from a wronged tenant. In addition, if a landlord entity owns several properties, it is inherently unfair that all of the other properties held by that entity be subject to claims of a wronged tenant who has claims related to one property.
One compromise might be to expand the clause to give the tenant the right to pursue net insurance proceeds or to give the tenant the right to pursue injunctive relief against a landlord as long as that action does not involve the personal liability of the landlord. There are still ways in each area of work we do, to protect or partially protect the client even the informed penny wise client.