The Law

President of Non-Entity Personally Liable by Ron Davis An attempt to avoid personal responsibility for rent payments has not gone well for a tenant of a North Carolina shopping center. The shopping center is Capital Square in Raleigh, and the tenant leased space there to operate a business known as Nu Dimensions Fitness Center, Inc. In so doing, he signed a personal guaranty, though with certain negotiated modifications. The most important of the changes was from a requirement that he would personally guarantee “all the rents, additional charges, and any improvement allowance due at the end of the lease for the entire term of the lease.” Instead, he would be obligated for a more limited amount that was roughly equal to twelve months’ rent, plus a certain portion of an improvement allowance. Soon after beginning operations, however, the fitness center began experiencing financial problems. As a result, the tenant fell behind in paying his rent. The center’s management reacted by sending him notices of default, while also affording him a chance to correct the problem. But the tenant continued to struggle to bring his rental account up to date, and in the end, the center’s management notified him that he must vacate the premises. The resulting dispute eventually required a court trial. A judge subsequently found the tenant liable under the terms of the personal guaranty (though not liable on the underlying lease contract). In addition, the court found that Nu Dimensions Fitness Center, Inc., is not a legal entity and that the tenant signed the lease as president of that company. Finally, the judge noted that the tenant apparently knew he was signing the lease as president of a nonexistent corporation. That decision satisfied neither the center’s owners nor the tenant. On appeal, the tenant argued that the judge erred in his interpretation of the personal guaranty. That guaranty, he explained, limited his liability. In so claiming, he noted that in the language of the guaranty the word “first” precedes the word “default.” That means, he added, that the center may collect from him [the guarantor] a sum equal only to twelve months of rent following any uncured default or the last uncured default. In North Carolina, however, officers or directors of a corporation are personally liable for any and all contracts entered into “due to their affirmative actions or acquiescence,” even when they are aware that that corporation is not a legally recognized corporation at the time of contracting. The Court of Appeals of North Carolina ruled in favor of the shopping center’s owners, explaining, “The [tenant] is personally liable for the breach of the lease [even though] he signed the lease as the president of a corporation that he knew did not legally exist.” (WRI/Raleigh LP v. Richardson, 2013 WL 5629363 [N.C.App.]) Decision: October 2013 Published: November 2013