In a recent Alberta decision, a landlord sued three lawyers for unpaid rent for the commercial location of their law firm. However, because the landlord had previously settled with one of the lawyers, the court determined that the two remaining lawyers could not be held liable.
Landlord Sues Lawyers for Unpaid Rent
The landlord entered into a commercial lease with a law firm on November 3, 2009. The term was for ten years.
At the foot of the lease document, the tenant was identified as the law firm and was signed by three of the firm’s lawyers, all of whom were partners in the firm.
The lease did not indicate whether the law firm was a partnership, a corporation or simply a trade name.
The landlord applied to the court for summary judgment against two of the lawyers for unpaid rent in the amount of $81,150 plus interest; the landlord had already settled with the third lawyer for $30,000.
The key issue was whether the two remaining lawyers were personally liable for the unpaid rent under the lease.
The landlord argued that the lawyers had executed the lease in their own capacity and each was personally liable.
In response, the two lawyers claimed that they had joined the law firm as partners, but had since left the partnership with the third lawyer. As a result, the two lawyers denied any liability for the rent claimed by the landlord because it was for monthly rent accruing long after they had ceased being partners in the law firm. Additionally, they argued that the law firm partnership did not exist when the monthly payments came due because there was only one partner left at that time (the third lawyer) and a partnership requires more than one partner.
Finally, the two lawyers asserted that pursuant to s. 11(2) of the Partnership Act the liability of the partners was only joint, and not joint and several. As a result, they argued that because the landlord had settled with the third lawyer, the indebtedness of the law firm partnership was also extinguished as a matter of law.
Court Rules Against Landlord
First, the court found that there was no evidence that the law firm was a limited liability partnership and therefore it was a normal partnership wherein each partner is jointly liable in their personal capacity for debts and obligations incurred by the partnership, under s. 11(2) of the Partnership Act, which states:
11(2) Each partner in a firm is liable jointly with the other partners for debts and obligations of the firm incurred while the partner is a partner.
Additionally, s. 20(2) of the Partnership Act states:
20(2) A partner who retires from a firm does not by reason of retirement cease to be liable for partnership debts or obligations incurred before the partner’s retirement.
The court therefore determined that the law firm and its partners had become liable to pay the rent under the lease when the lease was signed. The court stated that just because the lease provided for payments of rent on a monthly basis, it did not mean that was when liability was incurred. The court explained:
“In fact, [the law firm] and its partners promised to pay “Annual Rent” in a specified amount for years one through five and a larger amount in years six through ten. In my view, these promises to pay Annual Rent were contractual covenants made at the time of signing the Lease, but were to be fulfilled or executed in the future.
Pursuant to ss 20(2) of the Partnership Act [the two lawyers] did not cease to become liable for rent due under the Lease even though they ceased to be partners and even though the partnership came to an end before the monthly payments were due.”
However, the court then turned to the issue of whether settlement with one joint debtor is a settlement with all joint debtors; and if so, whether it had application in this case. After reviewing relevant common law principles and case law, the court determined that the principle of law that the release of one joint debtor releases all joint debtors applied to the case at bar. In other words, because the landlord had settled with the third lawyer, that settlement extended to the two other lawyers and they had been released from liability for unpaid rent.
As a result, the court dismissed the landlord’s application.
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Entering in to a commercial lease represents a huge financial commitment and comes with significant legal risk. Because of this, it is critical for both landlords and tenants to obtain the advice of an experienced commercial leasing lawyer when negotiating a commercial lease and certainly before finalizing any agreement.
At DBH Law in Calgary, our experienced commercial real estate lawyers help our clients manage the risks of commercial leasing by providing trusted guidance in all aspects of their leasing affairs.
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