Impact on landlords of new Seattle ordinance to limit tenants’ personal liability in commercial leases.
By John Fandel and Nathan Luce
Stoel Rives llp
The Seattle City Council passed a new ordinance recently, attempting to limit personal liability for small business owners in commercial lease defaults. As written, it’s unclear whether the ordinance will have its intended effect.
The bill is a response to the ongoing COVID-19 pandemic. It is intended to protect small business owners from personal liability if their business goes under and they cannot pay the rent. More specifically, the bill limits the enforceability of “provisions in a commercial lease or other commercial rental agreement that makes the tenant or one or more persons who are not the tenant wholly or partially personally liable” for lease expenses.
The bill applies to non-profits or qualifying small businesses. For an entity to qualify as a “small business” it must (a) be owned and operated independently from all other businesses (or a franchisee with five or fewer franchise units), (b) have 50 or fewer employees, and (c) be neither a general sales or service business with 10 or more locations in operation worldwide nor an entertainment use with five or more locations in operation worldwide.
The limit on enforcement is effective during the city’s current COVID-19-related emergency proclamation, and for a period of six months after it expires.
The bill’s ambiguous language creates uncertainty regarding its effect. The ordinance only prohibits enforcement of “provisions in a commercial lease or other commercial rental agreement” that make someone “personally liable.” The issue is that personal liability in commercial leases usually arises when an individual (often the business owner) signs a separate guarantee. The lease itself almost never contains “provisions” that make someone other than the tenant “personally liable.” This ordinance does not address enforcement of a guarantee—an entirely separate legal contract. Therefore, while it appears that the intent of this ordinance is to limit enforcement of personal liability of the type that would arise from a guarantee, it’s not clear whether this ordinance does that.
Tenants personal liability
The ordinance also appears unintentionally overbroad in its protections.
Notably, it would prohibit landlords from enforcing provisions that would make “the tenant … personally liable.” Presumably, the intent was to cover situations where the tenant is an individual (rather than a corporation, limited liability company, or other legal entity).
But what does this language mean for leases where the tenant is an LLC or other corporate entity? Saying that the “tenant” cannot be “personally liable” is akin to saying that the tenant has no liability whatsoever. Arguably, the ordinance appears to overlook individual business owners who signed separate guarantees, while inadvertently making the tenant entity itself immune to all liability.
For now, landlords should be aware of potential roadblocks to pursuing guarantors (notwithstanding the unclear language in this ordinance). We will continue to monitor implementation and enforcement of this ordinance and will provide updates if clarifying amendments are passed.
About the authors:
John Fandel has more than 25 years of experience in commercial real estate leasing matters for local, national, international, institutional and telecommunications industry clients, including but not limited to data center tenants, shopping center owners, national retailers, and office property landlords and tenants, as well as owners and developers of mixed-use real estate projects.
Nathan Luce focuses his practice on representing buyers, sellers and lenders in acquisitions, dispositions, development and financing of commercial, retail, multifamily, and condominium projects. He also has experience representing landlords and tenants in the drafting and review of leases for a wide range of commercial projects, including office buildings, shopping centers, restaurants and retail stores.