If you’re a business owner, you have likely entered into a lease at some point. It may have been for the real estate, office, warehouse, restaurant, etc., that you operate out of. Or it could have been an equipment lease, such as construction equipment, kitchen equipment, etc.
So if your business hits a rough patch and you are unable to pay the lease, things can get serious really quickly.
Personal Guarantee on a Business Lease
Most business leases require a guarantee of the lease, usually taking the form of a personal guarantee. This means that in addition to your company being liable for the debt, you are also personally liable.
If the personal guarantee wasn’t executed properly, then you may have a defense to the enforcement of it. But that isn’t often the case and we have to deal with the personal guarantee. This can be especially scary if you have personal assets you are concerned about. If you are early in the lease, you might be doing the math and think your financial exposure is enormous. Fortunately, there is a legal principle called the landlord’s duty to mitigate that usually comes into play.
Landlord’s Duty to Mitigate
An implied term in most contracts is the duty to mitigate. Mitigate what? Mitigate damages. In other words, even if you breach a contract/lease by not paying, the landlord is not allowed to just run up the bill and do nothing. The landlord typically has a duty to take steps to re-rent the property to another tenant or lessee. And they must do so as quickly and reasonably as possible. This is what is meant by the duty to mitigate.
Of course, you may also have a role to play in that process. It might be to your benefit to try to find someone else to take over the lease. But it’s important to remember that the landlord/lessor usually has the duty to mitigate even if your efforts fail.
For example, if you have 4 years left on a lease, the landlord can’t just sit on their hands and do nothing. They need to make diligent and reasonable efforts to re-rent that property to someone else, whether it’s a building or equipment.
Of course, all of this will depend on the specific terms of the lease and you should always have your lease reviewed by a licensed Arizona attorney to fully understand your rights and obligations.
Another reason to have your lease evaluated is to look for other possible defenses. Leases are not necessarily a one way street. They also create obligations for the lessor/landlord. If the landlord has acted in a way that actually harmed your business or even brought about the circumstances of your lease default, then you may have defenses that need to be asserted. You might even have a counterclaim or cause of action against the landlord. These can be important factors in resolving lease debt.
If you have a business lease in default or about to go in default, you should have your lease evaluated right away and develop a plan to assert any defenses you may have.