Written by: Guy Jeffress
The decision of the Supreme Court of Virginia in Grayson v. Westwood Buildings L.P., 300 Va. 25, 859 S.E.2d 651 (2021) highlights the need to confirm a tenant’s financial ability to pay the rent during the term of a lease and obtain personal guaranties regarding the same.
The facts of the cited case are complex but can be briefly summarized as follows: Landlord obtained judgments for unpaid rent against tenants. Landlord, upon finding that the tenants and their principals had engaged in a number of transactions that left the tenant entities all but insolvent, filed suit against both tenants and other parties claiming, in part, that the defendants engaged in a series of fraudulent conveyances and sham transactions designed to avoid the judgments. The trial court found in favor of landlord making each of the remaining defendants jointly and severally liable for unpaid rent, awarding the landlord attorney fees, and imposing sanctions. On appeal, however, the Supreme Court of Virginia reversed the trial court, vacated the judgments, and entered the opinion as final judgment. The court noted that the “badges of fraud” relied upon by the trial court to support its findings “did not apply here.” The opinion also noted that the landlord failed to perfect landlord’s security interest in tenant’s inventory and other assets (as landlord was permitted under the terms and conditions of the lease) and did not obtain a signed personal guaranty from principals of the tenants.
The purpose of this article is not to undertake a deep dive in the law of fraudulent conveyances but to illustrate some basic strategies a landlord could use to avoid an outcome similar to that in the above-referenced case.
First, as regards landlord lien rights we have noticed that many landlords are quick to negotiate their lien rights away. The lien right is a powerful remedy to landlord. If a tenant objects because the rights of a lender or lessor of equipment are primary, offer to subordinate landlord’s lien rights to that of the primary lien holder until such time as the primary lien is satisfied or extinguished. It is better to be in a subordinated position than to waive the lien rights altogether.
Second, obtain personal guaranties from tenant principals and their spouses. Under Virginia law guaranty agreements must be independent agreements that are supported by separate consideration. The terms and conditions of a guaranty should also include certain waivers including a waiver of the application of certain Virginia statutes. The absence of said waivers could delay or jeopardize a landlord’s recourse against the named guarantor.
Third, when vetting a tenant, a landlord should undertake sufficient due diligence to accurately determine the tenant’s management structure and its credit worthiness. Additionally, the landlord should try to keep tabs on a tenant’s financial condition throughout the term of the lease by including language in the lease that allows the landlord to request, from time to time, financial disclosures from a tenant which are (preferably) audited or certified as true and correct by a principal of the tenant.
Fourth, we advise letting one of our lease attorneys review letters of intent prior to sending them to prospective tenants. Our financing and lease attorneys frequently notice issues in letters of intent that put the landlord on its hind legs before the first draft of the lease is even circulated.
Fifth, do not negotiate against yourself and offer concessions the tenant does not ask for, and do not give into the frequent lament of tenant brokers, “it’s not market” without substantial and verifiable data to back it up.
Recent changes in the economy and lender practices are prompting building owners to review their lease forms. If you are feeling challenged by current circumstances or have not reviewed your lease forms in the last few years consider having the lease attorneys at Vanderpool, Frostick & Nishanian, P.C., review your lease and lease-related documents.
This blog post is not intended to provide legal advice or substitute for the advice of legal counsel with respect to specific facts and situations. See disclaimer