Limiting Your Liability in a Law Office Lease

In the late 1980's lenders began tightening their financial security requirement for tenants. This gave landlords recourse against the personal assets of individual partners of law firms in the event the law firm owed further obligations under the lease. Today, partners must be aware of the issues related to personal liability and resolve them during the negotiating process.

When signing a lease that requires the partners of your firm to personally guarantee the lease, you should seek to "cap" the amount. It is common leasing practice for landlords to agree to cap the aggregate personal liability for each partner of a law firm. However, determining the amount of the cap is negotiable. Usually the cap amount is based on the value of monetary concessions granted to the law firm under the lease. Sometimes this amount will include lost rent for the period in which the landlord attempts to relet the premises.

Once the liability cap is determined you should negotiate a clause that periodically reduces the cap amount. You should also restructure the personal liability from "joint and several liability" to "several liability." Therefore, each partner is only liable for a severed amount of the liability cap equal to that partner's proportionate ownership interest in the partnership.

Controlling the terms of the lease is largely attributable to bargaining leverage. If your firm has leverage over the landlord you should insist on a non-recourse lease. A non-recourse lease provides that the landlord has no recourse against the assets of the individual partners when exercising its rights and remedies pursuant to the lease. In other words, the landlord can only recover from the assets of the firm and any security rendered. Any landlord will resist releasing partners from liability, but if you have the leverage use it.

Under California law partners who are added to a partnership after the execution of the lease are not subject to personal liability, unless written otherwise. As such, landlords will insist on subjecting new partners to personal liability and/or require that withdrawing partners remain liable. The financial viability of a law firm is squarely attributable to the income generated by each partner; therefore a landlord will be concerned about adding and releasing partners without liability.

As a compromise you should try to negotiate a clause that releases retiring, deceased, incapacitated or withdrawing partners from personal liability in exchange for new partner's liability. The end result may hinge on whether you are negotiating a lease for a large or small firm. For large national firms the lease may set minimum numbers of liable partners. For smaller firms the landlord may insist certain key partners remain liable, even after they withdraw.

Adding and releasing partners can be a contentious issue, but negotiating a favorable clause is extremely valuable. Planning for the real estate needs of a law firm requires that you think long-term. It is important for the growth and flexibility of any firm that new partners can be added so that old ones can fade away. Before negotiating a limit on liability it is advisable that you speak to a Los Angeles real estate attorney.