Individual liability of individual who signs on behalf of the corporate tenant

In over 20 years of the legal hotline operation, it’s rare that we receive a question that has not been previously asked, but lo and behold, this question from a commercial agent is a first.

The question has to do with a provision in the PAR Commercial Lease (Form CL) found at paragraph 35, entitled Tenant’s Joint and Several Liability. The provision is intended to make each of the multiple tenants (if applicable) independently liable for the performance of all of the lease obligations, including its penalties and default provisions. In this way, if there are three tenants, only one of whom is solvent, the solvent tenant cannot limit his/her liability to one-third of the obligation, but remains liable for the entire amount owed. The reason that a landlord insists that multiple tenants remain jointly and severally liable is obvious.

This caller’s question had to do with the last sentence of the paragraph which states: “If Tenant named in this Lease shall be a partnership or other business association, the members of which are, by virtue of statute or general law, subject to personal liability, the liability of each member shall be joint and several.” The lease in question was signed by a member of the LLC that was leasing the property. The lease was signed by the individual who was identified as an authorized member as verified by the LLC’s operating agreement.

Q. Does the quoted language from paragraph 35 of the CL make the signing member of the LLC jointly and severally liable with the LLC for the obligations of the lease?

A. Generally, no. In most instances, members of Pennsylvania LLCs are not individually liable “by virtue of statue or general law” for the contracts they sign in their capacity as an authorized member. For the individual to be jointly and severally liability with the business entity, he would have to acknowledge his personal guarantee in a clear and unambiguous manner. The lease should include a provision that directly establishes the individual liability of the member or members, and perhaps their spouses. In most cases, the guarantor will be identified early in the lease as either a party to the lease or as a personal guarantor for the LLC. Finally, it must be clear that the member is signing both in his/her authoritative capacity for the LLC as well as in his/her individual capacity.

It is not uncommon, however, for individuals to form limited liability companies in other states, and those states’ laws may affect members’ personal liability differently from Pennsylvania law. It is also possible, though not frequently encountered, that the LLC operating agreement may attach personal liability to certain members in certain situations, such as entering contracts. If your client has questions about the scope of liability of the LLC, its members, or any combination, they should consult an attorney.

Whether it is advisable to make corporate members, partners, spouses or others guarantors individually liable for the debts of a business entity is an issue for negotiation. Can a landlord afford to lose prospective tenants unwilling to take on personal liability? Should the landlord assume the risk of taking on a tenant in a multi-year lease when the LLC is only one day old? The answers to this and similar questions have to do with such factors as the marketability of property and the factors that affect marketability, as well as the level of risk the landlord is willing to absorb.

If guarantees and individual liability is sought, the matter should be referred to the landlord’s attorney who will assure that the additional language is properly drafted and attached to the lease. There are other ways that a lease can be securitized and this is a matter for the landlord who is properly represented by counsel. If a landlord is interested in securing individual liability through personal guarantees, or otherwise providing security for the lease, the landlord should consult their attorney (as should any tenant!).