October 11, 2018
Litigation Update – New case from Tennessee Supreme Court holds individual liable for personal guarantee in commercial lease.
It is not uncommon for a commercial landlord to require a personal guarantee on the lease for a commercial tenant especially for young businesses and start-ups. The courts in Tennessee have been wrestling with the issue of personal guarantees in commercial leases and just this past week the Tennessee Supreme Court issued an opinion in the case of MLG Enterprises, LLC v. Richard L. Johnson which provides some guidance on what commercial landlords must do to ensure an enforceable personal guarantee.
In the case at hand, the lease included a paragraph holding the tenant in his individual capacity personally liable for all of the tenant’s obligations under the lease. Then the lease had three signature lines.
- Landlord – MLG Enterprises, LLC
- Tenant – Moblie Master Manufacturing, LLC – signed by Richard L. Johnson, President
- Richard L. Johnson – signed by Richard L. Johnson
After the 3rd signature, Mr. Johnson wrote “for Mobile Master Mfg. LLC.”
Tenant abandoned the premises and Landlord brought suit against Mr. Johnson for damages. The trial court ruled for Mr. Johnson and the appellate court affirmed. Both the trial court and the court of appeals held that Mr. Johnson’s second signature did not bind him personally because he had written “for Mobile Master Mfg. LLC” after his name.
Both the lower courts relied on prior Tennessee cases that established the presumption that when a party signs his or her name to a contract and includes “for (a particular entity)” it is a clear indication of the individual’s intent to sign in a representative capacity.
The Supreme Court reversed the lower courts based on broader contract interpretation rules. The cases on which the trial and appellate courts relied were based on contracts with only one signature by the tenant/guaranteeing party. In the MLG Enterprises case, there were two signatures, one for the tenant and one for the guaranteeing party. The Supreme Court held based upon the personal liability language of the lease and the two signatures that Mr. Johnson was personally liable under the lease even though he wrote “for” after his signature. Their reasoning was, among other things, that the second signature – if not to bind Mr. Johnson personally, was completely superfluous.
Commercial leases can be lengthy contracts that are heavily negotiated to protect the interests of both landlords and tenants. If you or your business are considering entering into a commercial lease, let the experienced business and real estate attorneys at Lodestone Legal Group discuss the potential pitfalls and liabilities to be aware of and to avoid.
If you are a commercial property owner looking to develop and lease space, our attorneys can assist in the drafting and negotiating leases that meet current Tennessee law to ensure enforceability and minimize potential losses due to tenant breaches.