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This question involves a commercial lease agreement using the…

This question involves a commercial...
This question involves a commercial lease agreement using the AIR Commercial Real Estate Association Standard Industrial/Commercial Single-Tenant Lease document.

Question 1:
We have a couple different choices in terms of what entity to sign the lease under.

1. Sign it under our corporation "Acme, Inc., a California corporation" with an individual as a guarantor.
2. Sign it under a corporation AND an individual: "Acme, Inc., a California corporation; and XXXXX XXXXX, an individual" with no guarantor.

Which method would be preferred considering both tenant rights and reducing liability? Under method method 2, are there any advantage in terms of rights to the individual? Is there any risk of liability to the individual assets?

Under method 1, do we lose any rights as an individual?

Question 2:
What is the best way to protect the tenant from an increase in property taxes resulting in a sale of the property. If for example, the building was purchased 10 years ago and then sold during the course of our lease, there would be a substantial increase in the property taxes. In another scenario, if the lessor passes away and the building is inherited, the property tax would be assessed in accordance to the current true market value of the property.

In these circumstances, would we as the tenant be responsible for these increases in property tax in the form of any passover clause in the standard AIR Commercial lease agreement?

If so, please offer appropriate verbiage to protect against such increases in property taxes.
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Answered in 36 minutes by:
4/28/2012
socrateaser
socrateaser, Lawyer
Category: Real Estate Law
Satisfied Customers: 40,074
Experience: Attorney and Real Estate broker -- Retired
Verified
Question 1:
We have a couple different choices in terms of what entity to sign the lease under.

1. Sign it under our corporation "Acme, Inc., a California corporation" with an individual as a guarantor.

2. Sign it under a corporation AND an individual: "Acme, Inc., a California corporation; and XXXXX XXXXX, an individual" with no guarantor.

Which method would be preferred considering both tenant rights and reducing liability?

A: Signing the agreement as an individual provides no protection at all, because the individual signing is jointly and severally liable for anything and everything concerning the lease. Signing as a personal guarantor makes that person secondarily liable if the corporation defaults under the lease -- however, in the event that the lease is assigned to a third party by the landlord, the guarantor's liability in some circumstances may be terminated.

Therefore, given the two options, the personal guarantor option is preferred (though, in my opinion, there is no way that I would ever personally guarantee anything in a business transaction -- so from my perspective, neither option is acceptable, and I would reject the deal entirely.

Under method 2, are there any advantage in terms of rights to the individual?

A: See above.

Is there any risk of liability to the individual assets?

A: The individual in both scenarios could be completely wiped out financially by a corporate default on the lease.

Under method 1, do we lose any rights as an individual?

A: See my first answer above.

Question 2:
What is the best way to protect the tenant from an increase in property taxes resulting in a sale of the property. If for example, the building was purchased 10 years ago and then sold during the course of our lease, there would be a substantial increase in the property taxes. In another scenario, if the lessor passes away and the building is inherited, the property tax would be assessed in accordance to the current true market value of the property.

A: Don't agree to pay any increase in taxes beyond that which would ordinarily accrue were the property to be transferred to a third party.

In these circumstances, would we as the tenant be responsible for these increases in property tax in the form of any passover clause in the standard AIR Commercial lease agreement?

A: It depends on how the lease is written. If you're not careful, then you'll probably be held liable, because the landlord will want to make the agreement as favorable as possible to the landlord.

If so, please offer appropriate verbiage to protect against such increases in property taxes.

A: Something like: "If the real property subject to this lease is transferred in a manner which effects a 'change in ownership' under Cal. Revenue and Tax Code Section 60 et. seq., Tenant's liability for payment of taxes under this lease shall be no more than that which would have applied had no change in ownership ever occurred."

Hope this helps.

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Customer reply replied 6 years ago
Great answer, thank you.

Just one question. Does signing it under a corporation and as an individual create any liability outside of of the lease. For example, if a customer or employee were to get hurt at our property or from our products, can then choose to come after my personal assets since the property was leased under my personal name?

Does signing it under a corporation and as an individual create any liability outside of the lease. For example, if a customer or employee were to get hurt at our property or from our products, can then choose to come after my personal assets since the property was leased under my personal name?

A: Yes. If an individual signs the lease in his/her individual capacity, then he/she will be jointly and severally liable for wrongful acts committed on the property. Whereas a personal guarantor's liability is limited to the terms of the guarantee (presumably, the rent, and any damages directly incurred under the lease).

Hope this helps.

NOTICE: My goal here is to educate the public about the law. Please help me in this effort by clicking Accept (or, click on one of the happy smiley faces/stars/etc., if applicable) for my Answer to your Question. If you have a subscription account, clicking Accept does not create any additional charge. It merely gets me credit for my Answer.

And, if you need to contact me again, please put my user id at the beginning of your question ("To Socrateaser"), and the system will send me an alert. Thanks!

Please Click the following link for IMPORTANT LEGAL INFORMATION.

socrateaser
socrateaser, Lawyer
Category: Real Estate Law
Satisfied Customers: 40,074
Experience: Attorney and Real Estate broker -- Retired
Verified
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