October 30th, 2012 / Insight posted in

Limit the liability on your lease

HB writes: Our partnership has sold its premises and is about to sign a 25-year lease on new offices. The three partners are concerned that they could have an on-going liability on the lease in the unlikely event that the business went under in the years ahead. Should we create a limited liability partnership (LLP) to hold the lease so as to reduce our liability?

As an unincorporated partnership, the three partners have joint and several personal liability under the lease, writes Jon Sutcliffe, partner at Kingston Smith LLP.

You could use an LLP or limited company to hold the lease. In theory this would limit the partners’ liability, but in practice this is highly unlikely to work. A landlord will want to have adequate security that the rent will be paid. As this would not come from the LLP, the landlord would seek some form of personal guarantee from the partners. So the partners would still have personal liability, defeating the point of the LLP.

A 25-year lease for a small business is unusual because this is a long period over which to plan. If you are looking to limit your risk, consider negotiating a shorter lease with break clauses that will reduce your risk to acceptable levels.

Alternatively, you could lease premises that would easily attract a new tenant if you had to leave.

Each of the partners should make sure they are happy with the term of the lease. Any partners due to retire during the term of the lease should pay particular attention — they may want an indemnity from the partners who will stay on to run the business.